Question 2 6 marks The following are separate situations wh

Question 2 ( 6 marks)

The following are separate situations where the independence of the Auditor is subject to threat.You are asked to identify the name of the threat to the Auditor’s independence and briefly explain why it is a threat

(a) Leona Ng ,the Senior Accounts Manager ,from Jenkins Ltd has fallen ill and will need replacing
      for the next four months.Your accounting firm,Thornleigh Accountants has been asked to supply
      a staff member on secondment until Leona Ng returns. Your firm has supplied Jane Davis and
      she finished up after four months in mid May .Your firm is going to do the audit of Jenkins Ltd
       from mid July and intend to use Jane Davis as part of the audit team.

(b)John Darrow ,the Audit Manager of the Darrow Associates Accountants ,has just received the
      accounts from Winmalee Ltd .This has taken an optimistic approach to the valuation of
      development expenditure capitalised in intangible assets .The senior staff bonuses are all related
      to the firm’s profit performance and                  Winmalee have provided paper copies of details taken from
      various accounting standards,as well as computer files with reports which are sympathetic to
      their approach to valuation of these assets .



( c) The Chocolate company has asked your firm to carry out the audit of its financial statements .
       It also has invited your firm to visit its seconds chocolate shop where defective chocolates are
       sold at a considerable discount prior to completing the audit .The Chocolate company has
        invited members of your firm to join the Chocolate company’s social club.

Solution

a. Yes, there is a threat to auditor independence in form of Ex-staff and partners threat because she was ex employee there for more than four months and self-review threat because she would be reviewing her own work, plus Jane Davis may have created a social bond with the employees which is also a threat. In the United States, therefore, there is a requirement of a one-year cooling-off period.

b. Here, a self-interest threat of not losing a client is in place because since the pay of the top management is linked to the profit they make, it is possible that they may want their auditor to submit to their demands, moreover, threat of losing a client for John Darrow, the Audit Manager of the Darrow Associates Accountants, if management gets upset because of negative report is also looming.

c. Joining a social club will eventually lead to forming a bond among the members of the firm and the employees of the client company. There will be a threat of social bonding which may lead to modifying the report to honor the personal relations.