You are an audit manager with Clarke & Johnson (CJI). For the past years CJ has been the auditor of luxury Travel Holidays LTD (LTH), a travel company. Geoff, the audit partner, has asked you the to...

AUDITING AND ASSURANCE

AUDITING AND
ASSURANCE
Auditor Independence & Business Risks

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AUDITING AND ASSURANCE
Question 1
a) Threat – The key concern in this case is regarding the CEO of the client wanting to given the
audit contract on the pre-condition that the audit partner would engage in promotional speech
to be attended by the investors. Such an action leads to the threat of advocacy in accordance
with the Section 200-6 , APES ethics code. Thus, no member of the profession must engage
in any activity which tends to be promotional for the client as there would be perceived
independence threat i
espective of whether actual independence is threatened or not. The
given threat is not very significant (APES, 2010).
Mitigation – In order to address the above concern, the audit firm must endorse a policy stating
that participation of auditor in any promotional event or seminar as a speaker is prohibited as
there is advocacy threat. Also, the client firm can mitigate the concern by ensuring that external
auditor selection process is transparent and ca
ied by the board of directors while taking the
inputs of the management (Arens et. al., 2012).
) Threat – In the given case, the client’s CEO intends that free holiday package be extended to
the audit partner and team member along with respective families and the whole expense to
e borne by the client. Such an action would lead to familiarity threat in accordance with
Section 200-7, APES ethical code. It is fo
idden for the members of the profession to
accept any material gifts from the client i
espective of the underlying motive and the form.
This not only presents a compromised perceived independence but also actual independence
may be compromised (APES, 2010).
Mitigation – In order to address the above concern, the audit firm must endorse a policy stating
that acceptance of all gifts of material monetary value is prohibited as there is familiarity threat.
Further, token gifts of insignificant value may be accepted and the limit must be quantified not to
leave any ambiguity. Also, the client firm can mitigate the concern by ensuring that corporate
governance practices do not allow gift extension to external auditor or any employees of the firm
i
espective of whether the individual is part of the audit team or not (Gay and Simnett, 2012).
AUDITING AND ASSURANCE
c) Threat- In the given case, the concern is regarding the joining of Michael on the audit team
as he has disclosed that his father occupies a senior position in the company that the team
would audit. Such an action would lead to familiarity threat in accordance with Section 200-
7, APES ethical code (APES, 2010). The threat in quite significant for the given scenario as
the actual independence of Michael would be impaired and he most probably would not be
able to perform his duties with requisite objectivity and due-diligence. Also, his father could
potentially exert influence in order to affect the audit report (CPA, 2013).
Mitigation: One of the measures to be taken by the firm would include disclosures to be made
y the employees not only when assuming responsibility as an employee but...