Auditing Report: PDW and Peechee Ltd Independence Threats

This report provides an analysis of potential independence threats faced by PDW in its relationship with Peechee Ltd. The study identifies key considerations, including PDW's revenue dependency on Peechee Ltd, the appointment of a new engagement partner with potential conflicts of interest, and the assignment of assessing the value of Peechee Ltd's inventory management system. The auditor examines these threats, distinguishing those that pose a real risk to independence from those that do not. The report outlines relevant rules and regulations, such as APES 110, and recommends safeguards to protect PDW, including reducing revenue dependence, involving IPA members, and ensuring audit team members possess necessary subject matter expertise. The auditor highlights ethical issues related to the long-term relationship, potential share ownership by the new engagement partner, and the value assessment assignment, concluding with recommendations to the Senior Audit Partner to mitigate identified risks and maintain independence.

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Executive Summary
The aim of the study is to find key considerations in each of the three potential threats that
have been identified. From the potential threat statement, the Auditor will identify and
explain the possible threats that PDW will face from Peechee Ltd in terms of the
independence of the company. Also, some of the potential threats will not pose any actual
threat to the independence of PDW. These threat statements will also be identified and
explained by the auditor. The rules and regulations that can be applied to safeguard PDW
against the potential threat and also the rules and regulations that have to be maintained and
followed by PDW to continue the operations with Peechee Ltd have been identified. Finally,
the auditor will make recommendations to the Senior Audit Partner of PDW to protect the
company against the potential threats that have been identified. There are several ethical
issues that have been identified by the auditor in the three potential threats. In the first
potential threat, the auditor finds that there is a long term relationship between PDW and
Peechee Ltd. Again, Ryan Wyatt who may be appointed as the new engagement partner of
Peechee Ltd has ownership of a huge number of shares of Peechee Ltd. There are also certain
recommendations made by the auditor to the senior audit partner of PDW. Firstly, PDW must
reduce the dependence on Peechee Ltd to earn revenues. The auditor must involve the
members of the IPA to analyze the situation. Also, Peechee Ltd has to appoint new members
who have subject knowledge of the inventory management system to be able to properly
assess the value of the system.

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Table of Contents
Key Consideration 3
Threats related to Independence 3
Rules and Regulations 4
Recommendations 5
Reference 6

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Key Consideration
For the first potential threat, the key consideration is that PDW has a high dependency
on Peechee Ltd to earn revenues and PDW has been in business with Peechee Ltd for a very
long time (Shen et al., 2017). Secondly, it has been identified that Peechee Ltd is appointing a
new engagement partner. But then to be appointed engagement partner of Peechee Ltd has
not been provided with proper information by the previous engagement partner. Thirdly,
Peechee Ltd is upgrading the inventory management system to better manage the transactions
and has given the assignment of assessing the value of the inventory management system to
PDW.
Threats related to Independence
According to the first potential threat to the independence of PDW, it is found that
Peeche Ltd has continued to be a client of PDW for ten years. This does not pose any threat
to the independence of PDW as PDW is gaining a good relationship with a client for years
(Adler et al., 2018). But, there can be a threat that Peechee Ltd may have an interest in
acquiring the business of PDW as if it acquires PDW the cost that is incurred by Peechee Ltd
for auditing its various processes will be reduced. Again Peechee Ltd will also be able to
provide auditing services to other companies if it acquires PDW (Collins & Quinlan, 2020).
The second potential threat mentions that Ryan Wyatt who will be the new engagement
partner for Peechee Ltd has ownership of 1000 shares of Peechee Ltd. This does pose a threat
that the soon to be engagement partner of Peechee Ltd has the interest to gain ownership
through the buying of a large number of shares (Groomer & Murthy, 2018). This poses a
threat to the independence of PDW that Ryan Wyatt might also be looking to buy the shares
of PDW to gain ownership of the company (Knechel, Thomas & Driskill, 2020). The third
potential threat mentions that Peechee Ltd had upgraded its inventory management system
but the value of the system that was incorporated in Peechee Ltd was not analyzed. So, the

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task for the analysis of the value of the inventory management system was given to PDW
(Kearns et al., 2017). This does not pose any threat to the independence of PDW as this is an
opportunity for PDW to earn revenue by analyzing the value of the management system.
Rules and Regulations
For the first potential threat that has been identified Peechee Ltd has been an audit
client of PDW for more than ten years. This poses a threat to PDW as a large portion of the
revenue earned by PDW comes from the audit of Peechee Ltd. According to APES 110
s291.148, the amount of threat faced by PDW will depend on the qualitative and the
quantitative ability of PDW (Knechel & Salterio, 2016). Also, the threat will also depend on
the extent to which PDW is dependent on Peechee Ltd to earn revenues. To safeguard PDW
against the threat PDW must reduce the dependence on Peechee Ltd to earn revenues. Also,
the members of the audit team for Peechee Ltd must review the tasks before starting their
work. The quality of the audit must also be reviewed. In the second potential threat, it has
been identified that there is a new appointment to be made that is Ryan Wyatt who served in
the audit team for the last two years is to be appointed as the new engagement partner of
Peechee Ltd. According to APES 110 s210, the new partner must have been appointed before
the resignation of the previous engagement partner. The previous engagement partner was
required to provide information to the new engagement partner of Peechee Ltd. To safeguard
against this threat the members of the IPA will have to analyze all the factors that are
involved in the process. According to the third potential threat, it has been found that Peechee
Ltd has given the task to PDW to assess the value of the inventory system that has been
implemented by Peechee Ltd. According to APES 110 s291.133, for assessing the value of
the inventory management system PDW is responsible to have subject knowledge on the
inventory system.

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Recommendations
For the first potential threat, PDW must reduce the dependence on Peechee Ltd to
earn revenue. PDW must increase its opportunities and look for other clients. This will help
PDW to reduce the company’s dependence on Peechee Ltd to earn revenues (Rezaee et al.,
2018). For the second potential threat, PDW must analyze the level of threat that is posed by
the appointment of Ryan Wyatt as the new engagement partner at Peechee Ltd. PDW must
also take the help of the IPA in this situation. The third potential threat can be safeguarded by
PDW by appointing members in the audit team who have knowledge of assessing the value
of the inventory management system that has been incorporated by Peechee Ltd for managing
the transactions.

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