Auditing and Assurance: Analysis of Independence Issues in Audits

This report addresses potential independence issues encountered during audits of Scooty Pty Ltd, Pyeong Ltd, Bobsleigh Pty Ltd, and Morris Davidson, in accordance with APES 110. The issues highlighted include the audit firm acting as an expert witness, preparing income tax returns, providing routine data input, and family relationships between auditors and client directors. Each issue is analyzed for potential threats, such as advocacy, self-review, self-interest, and familiarity threats, and corresponding safeguards are recommended to mitigate these risks, including professional reviews, assigning different personnel, and restructuring audit team responsibilities. The report emphasizes the importance of addressing these issues before forming an audit opinion and provides a detailed overview of the potential conflicts of interest and the measures required to maintain auditor independence.

Running head: AUDITING AND ASSURANCE
Auditing and assurance
Name of the student
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To: [e-mail]
Cc: [e-mail]
Bcc: [e-mail]
Subject: Potential independence issues
Dear Ms Burton,
I would like to inform you regarding the audit issues recognized while auditing Scooty Pty
Ltd, Pyeong Ltd, Bobsleigh Pty Ltd and Morris Davidson. The issues were regarding the
assessment of independence issues with the application of APES110. The potential threats
and recommended safeguards are mentioned below –
1. Scotty Pty Ltd
1.1 Issue – the company requested the audit firm to become the expert witness in the
court case for providing litigation service for claiming insurance in the loss in
business profits
1.2 Potential threats – if the audit firm provides the service associated with litigation
support to the audit client and service includes estimation of damages or any other
amounts that have an impact on the financial statement of the company on which the
audit firm will express their opinion, the service will create advocacy threat or self-
review threat.
1.3 Recommendations - significance of created threat shall be evaluated and if it is not
significant clearly safeguards shall be considered and applied. The safeguard includes
– (i) carry on professional review for the valuation or audit work performed or (ii)
making the arrangements in such way that the personnel offering such services will
not be included in the audit engagement.

2. Pyeong Ltd
2.1 Issue – the company requested the audit firm to prepare the income tax return and
calculation of deferred and current tax assets and liabilities.
2.2 Potential threat – while the audit firm provides taxation services that includes
preparation of tax return and calculation of tax it will create advocacy threat and self-
review threat. However, providing such services will not create any independence
threat if the management takes the responsibility with regard to the returns that
includes significant judgements.
2.3 Recommendation – safeguards under such circumstance will include – (i) using the
professional who is not the audit team member, or (ii) obtaining the advice from any
external professional on tax, or (iii) if service is performed by audit team member
then using the senior staff or partner who has expertise knowledge and who is not
audit team member for calculating tax
3. Bobsleigh Pty Ltd
3.1 Issues – the company requested the junior member of the audit team to undertake the
routine task of data input
3.2 Potential threat – if the audit team member is engaged for providing accountancy
services that includes input of routine data in absence of the client’s employee it will
create self-interest threat
3.3 Recommendation - safeguards under such circumstance will include – (i) using the
professional who is not the audit team member, or (ii) obtaining the advice from any
external professional
4. Snowslope Ltd
4.1 Issue – Wife of Senior auditor Morris Davidson’s wife is the director of audit client
firm

4.2 Potential threat – personal and family relationships among the senior audit member
and the officer or director of the client firm create familiarity, self interest and
intimidation threat.
4.3 Recommendation – under such circumstance, the safeguard may include to remove
the particular member from the audit team. Another safeguard against this threat is to
structure the responsibilities of audit team in such way that the particular member of
audit team is not able to deal with the matters that are associated with the
responsibility of the family member.
Therefore, I request you to take into consideration the above mentioned issues before
expressing any opinion regarding the audit of above mentioned companies.
Kind Regards and Thanks,
Ms. Taylor Dawson,
Audit manager,
Phoenix & Co
Mob No. 00 257 325

Bibliography
Accounting Professional and Ethical Standards Board (APESB). (2013). APES 110 Code of
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Carey, P. J., Monroe, G. S., & Shailer, G. (2014). Review of Post‐CLERP 9 Australian
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George, G., Jones, A., & Harvey, J. (2014). Analysis of the language used within codes of
ethical conduct. Journal of Academic and Business Ethics, 8, 1.
Ottaway, J. (2014). Improving auditor independence in australia: is ‘mandatory audit firm
rotation’the best option?.