QUESTION 2

Background Information

Consider the following independent situations:

1. You have established an audit practice with two separate divisions: account preparation and audit. Each division has a different partner and staff team. Your firm commonly prepares financial accounts and conducts audits. Your firm has recently been provided with a trial balance from a listed client Red Ribbon Ltd, for whom your firm is preparing the financial accounts and conducting the audit. The client has significant expertise and approves all adjusting journal entries.

2. Daniel Jackson is part of the audit team for the current audit of Jupiter Ltd. After 2 weeks at the client, he has advised you that he has been offered a job at Jupiter Ltd as soon as the current audit is finished.

3. One of your major clients, Fruity Juices Ltd, has talked to you about a consulting engagement next year for you to do a complete review of the adequacy of the entity’s quality controls over the production of its fruit juices. However, the managing director has indicated that some of the Board are concerned about you taking up too much of their staff’s time asking unnecessary questions. Therefore, he has suggested that your chances of getting the engagement will be significantly improved if you keep your questions of staff to a minimum during the current audit.

4. You have audited Apex Ltd, a stable engineering firm, for several years. At the start of this year, the finance director, Carol Ling, retired after 10 years with company and was replaced by Eric Lay, a long-time friend of the audit manager Bruce Li, who was best man at Eric’s recent marriage.

5. One of your audit clients, Super Trooper Ltd (STL) is a large superannuation fund. The Australian Taxation Office has advised STL that it has rejected its taxation treatment of a material amount of income from investments and that it disagrees with the taxation advice STL gave to its members. The matter has been referred to the Superannuation Complaints Tribunal and STL has requested that you represent them at the Superannuation Complaints Tribunal.

REQUIRED:

For each of the independent situations above:

(a) Identify the type of potential threat to independence. Justify your answer.

(b) Explain what safeguards, if any, that could be implemented to reduce the independence threats.

(c) Assess whether audit independence can be achieved.