ACTB416 Tutorial 1 discussi

on

Nature of benefits of auditing

1a
I am not confident because:
1. The executive directors have incentives lik
e getting re-appointed and bonus to overs
tate the financial results of the company;
2. The executive directors have more inform
ation and they may not be willing to share
the information with the shareholders (inf
ormation risk).

1b
Auditing helps to maintain trust between sh
areholders and directors. By having a pro
fessional and independent audit, shareho
lders confidence about truth and fairness
of the financial statements prepared by th
e directors increases.

Professional ethics
Question 1
Issue 1 The concessionary mortgage inter
est rate is a gift from client. Gift from clie
nt creates self-interest threats unless th
e gift is clearly insignificant in value. The
concessionary rate is 1% below market va
lue and is clearly material in value.
Therefore, the audit firm, SMP, should apply
safeguard rejecting the offer from BNT.

 Issue 2 The relationship between Charles

and Peter may create familiarity threat.
However, more information is needed to ju
dge the situation (for example, how freque
nt they play golf together).
If the audit firm, SMP, finally concludes that
there is familiarity threat, SMP should remo
ve Peter from the engagement team as a sa
feguard.
On the other hand, if SMP concludes that th
ere is no familiarity threat, no action is nee
ded.

Question 2
Threat 1 It has been proposed that Bethan t
o become the independent reviewer of the
audit. This creates familiarity threat as Be
than has been associated with the client for
a long time (7 years).
Safeguard Bethan should not be the indepe
ndent reviewer of the audit.

Threat 2 Client request Bethan to attend the au

dit committee meeting. This create self-revie
w threat to independence.
Safeguard The firm should reject the request.
Threat 3 Client request the audit firm help in re
cruiting new non-executive directors. This cre
ate self-interest threat to independence.
Safeguard The audit firm may provide administ
rative works like advertising or headhunting at
reasonable fees. The firm should not make the
final recruitment decision (advocacy threat).

Threat 4 Self-interest threat of the high pr

ofessional fee (16% of total firms income).
Safeguard The firm should consider not prov
iding non-audit service (e.g. taxation) to clie
nt this year.
Threat 5 Last year audit fee has not yet settl
ed. Outstanding audit fee represents a l
oan to client (self-interest threat) and is pr
ohibited by the code of ethics.
Safeguard Request client to settle the fee bef
ore the start of current year audit.

Threat 6 Audit manager Willow left the au

dit firm and is employed by client as finan
cial controller. This creates familiarity th
reat.
Safeguards The audit firm should significa
nt changes the audit strategies and meth
ods in audit of coming year.