Auditing and Ethical Practice: Case Studies on Independence

This case study analysis examines the importance of audit independence in maintaining the quality of audit reports. It explores various scenarios where auditors face ethical threats, including self-interest, review, and familiarity threats, as defined by APES 110. The analysis presents specific situations involving potential conflicts of interest, such as family members holding shares in audit clients or receiving gifts. For each scenario, the document identifies the threats to independence, proposes potential safeguards to mitigate those threats, and provides an objective assessment of the impact on audit independence. The case study emphasizes the need for auditors to remain free from client influence and to provide an unbiased review of financial statements, which is crucial for investor confidence. The analysis covers scenarios related to shareholdings by family members, financial interests, and non-assurance services, concluding that maintaining auditor independence is vital for ensuring audit quality and the reliability of financial information.

Running head: AUDITING AND ETHICAL PRACTICE
AUDITING AND ETHICAL PRACTICE
Name of the Student
Name of the University
Author Note

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Introduction
The main purpose of the assessment is to analyze the importance of audit independence
for the perspective of audit. Audit Independence can be regarded as important consideration
which allows auditor to maintain the overall quality of audit. The independence of an auditor is
one of the fundamental concepts of audit and the same needs to be maintained by the audit
professional in order to accurately estimate whether the financial statements are showing true
and fair view (Martinov-Bennie and Mladenovic 2015). The assessment would be reviewing
different cases which shows different threats which an auditor faces while executing his duties.
The assessment would also be showing possible safeguard measures which the auditor can
implement in order to maintain the fundamental principle of independence. Some of the
important threats which affect the overall quality of audit are self-interest threats, review threat
and familiarity threat (Howieson 2017). It is to be further noted that the analysis would be
including an objective assessment of the threats which the auditor faces and possible measures as
well for avoiding the threats in the first place.

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SL.N
O
a.
Threats
Holding of shares by the
immediate family member of
an individual who is practicing
in the same office is a self-
interest threat (APES
110.R510.4)
An immediate family member
of Andrew, who is practicing
in the same office with
Michalle, who is an
engagement partner of the
client (Blue Steel Limited)
shall not hold any ownership
interest (APES110R510.4)
In the given situation the
engagement partner Michalle
and his partner Andrew are
working in the same office.
Andrew’s wife recently got
hold of minor ownership
interest around 4% as a result
of merger.
Safeguards
As per APES110.R511.9,
if the interest is received
by the immediate family
member by way of
inheritance or gifts as a
result of merger or in
similar circumstances,
then enough of the
indirect financial interest
shall be disposed of
immediately as long as it
does not remain material.
Otherwise, the self-
interest threat created
would be so significant
that no safeguard can
reduce the threat to an
acceptable level.
The other possibility is
that Andrew shall not
form a part of the team
member doing audit in
Objective Assessment
In this case the
independence will be
compromised if the
ownership held by
Andrew’s wife by way
of merger is not
surrendered.
Since Andrew does not
form part of the team
doing audit in Blue
Steel Limited (BSL),
hence his wife Susan
who recently got
ownership in the BSL,
is not required to
dispose of the share and
the independence of the
report may not be
compromised.
(APES110R521.4)

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BSL.
b. Any immediate family
member of the individual, who
is a partner in the audit,
holding shares in the client
company shall create a self-
interest threat (APES
110.R510.4)
An immediate family member,
of an audit team member or an
engagement partner in the
audit firm, which has been
appointed as an auditor of the
client, shall not hold any
shares.
In the given case, Michael
who is an engagement partner
in the ACA, has been
requested to participate in the
current year audit engagement
to be conducted by ACA in
Awesome Ferries limited
(AFL)
As per APES 110R520.4,
if an immediate family
member of the individual,
appointed to participate in
the audit engagement or is
an engagement partner in
the audit firm, is holding
shares in the audit client is
required to dispose of or
forfeits the total share-
holding before the audit
process starts. Or else, the
self-interest threat created
will be so significant that
no safeguard can reduce
the risk to an acceptable
level. The other possibility
is that Michael should
reject the request to
participate in the current
year audit engagement
with AFL
In this case the
independence of the
audit will be
compromised if the
shares held by the
daughter of Michael,
Serena, is not disposed
of or forfeited,
considering that
Michael accepts the
request to participate in
the current year audit
engagement.
However, if Michael
accepts the request to
participate in the audit
engagement then his
daughter is required to
forfeit her share, which
will ensure that audit
independence is not
compromised.

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c. Any firm, network firm, audit
team member, or an
individual’s immediate family
member, any other family
member, partner in the office
with the engagement partner
or any of the other partner’s
immediate family member
cannot have a direct financial
interest or an indirect financial
interest of material nature with
the audit client as it shall
create a self- interest threat.
(APES 110.R510.4)
The immediate family
members of the audit partner
cannot have a financial
interest in the audit client.
In the given case, Johnny is
appointed as an engagement
partner by Yummy Food
Services Limited. Johnny’s
As per APES 110.R510.4,
any family member or any
person directly associated
with the engagement
partner shall dispose all
the direct financial interest
gained from the firm
where his/her immediate
family member is an audit
engagement partner. Or
else, the self-interest
threat created will be so
significant that no
safeguard can reduce the
risk to an acceptable level.
The other possibility is
that Johnny should reject
the request to participate
in the current year audit
engagement with Yummy
Food Services Limited.
There is an exception to
In this case the
independence of the
audit will be
compromised if the
shares held by Rebecca,
sister of Johnny is not
disposed of or forfeited,
considering that Johnny
accepts the request to
participate in the
current year audit
engagement. However,
if Johnny accepts the
request to participate in
the audit engagement
then his sister is
required to forfeit her
financial interest, which
will ensure that audit
independence is not
compromised.

6AUDITING AND ETHICAL PRACTICE
sister owns a large number of
shares in a mutual fund named
XYZ Ltd which in turn invests
in Yummy Food Services
Limited. Johnny, on
Investigating the financial
report found that the
investments have doubled.
this situation as per APES
110.R510.5, where the
immediate family member
can hold material financial
interest in the client
company if such financial
interest is out of
employment purposes in
the form of salary,
pension, share option
plans or any other form.
d. Any firm, network firm, audit
team member, or an
individual’s immediate family
member, any other family
member, partner in the office
with the engagement partner
or any of the other partner’s
immediate family member
cannot have a direct financial
interest or a material indirect
financial interest in the form
gift, inheritance or any other
As per APES 110.R510.9,
any family member or any
person directly associated
with the audit engagement
partner shall dispose all
the direct financial interest
gained as well as non-
financial gain in the form
of gain from the client
firm. Or else, the self-
interest threat created will
be so significant that no
In this case the
independence of the
audit will be
compromised if the
gifts in the form of food
products are not
rejected by Kalra and
his assistant.

7AUDITING AND ETHICAL PRACTICE
kind of material nature from
the audit client as it shall
create a self- interest threat.
(APES 110.R510.9)
In the given situation, Kalra
White, who was the
accountant of Delicious Food
limited informed the auditor
Andrew that he and his
assistant received small gifts
as food item from the client
after completion of the
inventory observation.
safeguard can reduce the
risk to an acceptable level.
e. Any firm or a networking firm
before accepting or engaging
into providing non-assurance
services to an audit client have
to determine whether or not
such services might create a
threat to independence of an
auditor as it shall create a self-
interest threat (APES
According to APES
110.R600.4, if the non-
assurance services are not
at an accepted level then
such services should be
stopped because no
safeguard can reduce the
risk to an acceptable level.
In this case the
independence of the
audit will be
compromised if ACA
continues to provide the
listed non- assurance
services to GAL
knowingly that such
services is of material

8AUDITING AND ETHICAL PRACTICE
110.R600.4)
In the given situation ACA the
auditing firm was requested by
GAL, the client to design as
well as implement new IT
system for it as well as
providing advice on
structuring of its corporate
finance transactions.
impact to both the
parties.

9AUDITING AND ETHICAL PRACTICE

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Conclusion
The above discussion appropriately shows the importance of independence in an audit
process and why the auditor should ensure that the same is maintained in order to ensure that
quality audit report is provided (Sheehan and Schmidt 2015). The auditor should be free from the
influence of the clients and should provide an independent review of the financial position of the
business as the investors depend on such reports for making investment decisions. The above
analysis shows different cases and situations where the auditor’s independence is at stake and the
analysis identifies the possible threats which the auditor would be facing in the respective
situations (Simunic and Zhang 2015). In addition to this, the above discussion also provides
systematic measures which the auditor can adopt in order to maintain the independence principle
and thereby maintain the overall quality of audit. Therefore it can be said that independence of
an auditor is directly associated with the quality of audit and the effectiveness of the auditor’s
opinion.

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