Assessment item 3 - Case study: planning and
delivering the audit
You are one of two partners at Muppet Chartered Accountants (MCA), a
small, specialist audit firm with clients across Northern Victoria. It's a balmy
evening in early February 2022 and you're meeting with your audit team to
discuss issues with current clients that have 30 June year ends.
Question 1. Independence issues (4%)
An APES 110 review of all clients has revealed the following:
a. The long-retired founding partner of MCA, Barry Muppet, has operated a small
proprietary company through which he and his brothers own several
investment properties for 7 years. MCA has performed the annual audit (as
required by the company's constitution) for the same period of time. In
addition, it also processes the journal entries prepared by Barry Muppet,
extracts the trial balance, and prepares the financial report.
b. Dubbo Data is a listed IT company. The wife of the MCA manager on the
engagement, Jacqui Jones, recently purchased shares in Dubbo Data on the
advice of her financial planner.
c. Pegg Limited is a listed mining and energy company that MCA has audited for
the past 5 years. Shane Lund, the auditor in charge, recently purchased units
in a managed investment fund. In its product disclosure statement, the fund
disclosed that Pegg Limited was among its top 10 shareholdings.
d. Matthew James Partners is a law firm. MCA has performed the audit of MJP's
trust account for many years. Recently, the two firms agreed to combine their
collective expertise in the motor vehicle industry to set up a 'one-stop shop'
for motor vehicle dealers. The new business, called Dealer Management Pty
Ltd, hopes to capitalise on the profile of the two firms to woo motor vehicle
dealers away from their current advisers
Required
For each of the independent situations above and with reference to APES
110 answer the following questions:
1. identify and explain the potential threats to MCA.
2. recommend safeguards to reduce the independence threats
3. provide an objective assessment of whether audit independence can be
achieved.
,Answer this question using the following headings:
1. Threats 2. Safeguards 3. Objective
assessment
QUESTION 1 SOLUTION
CASE 1
THE POTENTIAL THREATS TO MCA.
In the given case the retired founding partner of MCA has operated a small
proprietary company and MCA has performed the annual audit for the same period
of time. This scenario highlights auditor of MCA as a threat to independence
because the founding partner is someone who can influence the objectivity of an
auditor. There might come a situation during audit work when the auditor might
have to be inclined to favor the founding partner. And this put the auditor in the
positing to be unable to attain the objective of the audit. In auditing, we called this
familiarity threat.
In addition, MCA also processes the journal entries, extracts the trial balance, and
prepares the financial report. This relationship creates more independence issue
and potential threat to MCA because auditing its own work lack objectivity and
significant biases to favor its own work. We called this self-review threat in auditing.
SAFEGUARDS
Conceptual Framework for Members in Public Practice serves as an important
document to shed the light on several independence issues and provide a guideline
for auditors if the issue can be reduced or eliminated if possible. 1 It outlines the five-
step process as highlighted in the figure below;
1
Auditing a practical approach with data analytics by Raymond Johnson
,Step 1 has been already discussed in the preceding section. In one step, the second
auditor has to try to evaluate the identified threat. The threat might be material or
non-material. If the threat is so material that the audit objective cannot be achieved
then the auditor should consider step 3. Regarding safeguarding, there are three
general ways. There is some specific safeguard created by the profession
(safeguard suggested in the code). The second is created by the client (the board
considering repressing some key personnel). The third type of safeguard is
implemented by the audit firm itself (involvement of another firm).
OBJECTIVE ASSESSMENT
Now we reached the fourth step in the framework. Here a critical objective
assessment has to be considered. Regarding the case presented the first familiarity
threat can be reduced if the old founder steps away from the board or if MCA
considered hiring another firm to assist during auditing, then only MCA can exercise
some independence and objectivity principles. The second self-review threat cannot
be reduced, and MCA should step away from providing the audit service.
CASE 2
POTENTIAL THREATS TO MCA.
In the given case Dubbo Data is a listed IT company and the wife of the MCA
manager on the engagement recently purchased shares in Dubbo Data on the
advice of her financial planner. This type of situation creates a self-interest threat
which implies MCA could gain some benefit financially or some non-material
consideration like the strong relationship whatsoever by altering the objective
assessment of the opinion on the financial report.
SAFEGUARDS
Conceptual Framework for Members in Public Practice serves as an important
document to shed the light on several independence issues and provide a guideline
for auditors if the issue can be reduced or eliminated if possible. It outlines the five-
step process as the highlighted previous image.
Step 1 has been already discussed in the preceding section. In one step, the second
auditor has to try to evaluate the identified threat. The threat might be material or
non-material. If the threat is so material that the audit objective cannot be achieved
then the auditor should consider step 3. Regarding safeguarding, there are three
general ways. There is some specific safeguard created by the profession
(safeguard suggested in the code). The second is created by the client (the board
considering repressing some key personnel). The third type of safeguard is
implemented by the audit firm itself (involvement of another firm).
OBJECTIVE ASSESSMENT
, The threat identified falls on being a manager to overcome the self-interest threat.
If the audit team finds a way to exclude the manager from the audit project, the
MCA can proceed further. But in practice, it is really hard for the team to exercise
independence and objectivity even if the manager steps away from the audit
assessment. So, MCA should step away from providing the audit service.
CASE 3
THE POTENTIAL THREATS TO MCA.
In the given case Pegg Limited is a listed company that MCA has audited for the
past 5 years. Shane Lund, the auditor in charge, recently purchased units in a
managed investment fund and become top 10 shareholdings. This type of threat
also falls into the self-interest threat. MCA has a significant interest to gain material
gain by artificially boosting the financial report. So they lack objectivity and
independence.
SAFEGUARDS
Conceptual Framework for Members in Public Practice serves as an important
document to shed the light on several independence issues and provide a guideline
for auditors if the issue can be reduced or eliminated if possible. It outlines the five-
step process as highlighted in the previous figure.
Step 1 has been already discussed in the preceding section. In one step, the second
auditor has to try to evaluate the identified threat. The threat might be material or
non-material. If the threat is so material that the audit objective cannot be achieved
then the auditor should consider step 3. Regarding safeguarding, there are three
general ways. There is some specific safeguard created by the profession
(safeguard suggested in the code). The second is created by the client (the board
considering repressing some key personnel). The third type of safeguard is
implemented by the audit firm itself (involvement of another firm).
OBJECTIVE ASSESSMENT.
Since the senior auditor in charge has a significant interest in the client to benefit
financially if the financial report is artificially boosted, the threat is beyond to
overcome so MCA should step away from the audit engagement.
Case 4
THE POTENTIAL THREATS TO MCA.
In the given MCA has been providing the audit to MJP's trust for many years.
Recently, the two firms agreed to combine their collective expertise to set up a
'one-stop shop' for motor vehicle dealers. The new business, called Dealer
delivering the audit
You are one of two partners at Muppet Chartered Accountants (MCA), a
small, specialist audit firm with clients across Northern Victoria. It's a balmy
evening in early February 2022 and you're meeting with your audit team to
discuss issues with current clients that have 30 June year ends.
Question 1. Independence issues (4%)
An APES 110 review of all clients has revealed the following:
a. The long-retired founding partner of MCA, Barry Muppet, has operated a small
proprietary company through which he and his brothers own several
investment properties for 7 years. MCA has performed the annual audit (as
required by the company's constitution) for the same period of time. In
addition, it also processes the journal entries prepared by Barry Muppet,
extracts the trial balance, and prepares the financial report.
b. Dubbo Data is a listed IT company. The wife of the MCA manager on the
engagement, Jacqui Jones, recently purchased shares in Dubbo Data on the
advice of her financial planner.
c. Pegg Limited is a listed mining and energy company that MCA has audited for
the past 5 years. Shane Lund, the auditor in charge, recently purchased units
in a managed investment fund. In its product disclosure statement, the fund
disclosed that Pegg Limited was among its top 10 shareholdings.
d. Matthew James Partners is a law firm. MCA has performed the audit of MJP's
trust account for many years. Recently, the two firms agreed to combine their
collective expertise in the motor vehicle industry to set up a 'one-stop shop'
for motor vehicle dealers. The new business, called Dealer Management Pty
Ltd, hopes to capitalise on the profile of the two firms to woo motor vehicle
dealers away from their current advisers
Required
For each of the independent situations above and with reference to APES
110 answer the following questions:
1. identify and explain the potential threats to MCA.
2. recommend safeguards to reduce the independence threats
3. provide an objective assessment of whether audit independence can be
achieved.
,Answer this question using the following headings:
1. Threats 2. Safeguards 3. Objective
assessment
QUESTION 1 SOLUTION
CASE 1
THE POTENTIAL THREATS TO MCA.
In the given case the retired founding partner of MCA has operated a small
proprietary company and MCA has performed the annual audit for the same period
of time. This scenario highlights auditor of MCA as a threat to independence
because the founding partner is someone who can influence the objectivity of an
auditor. There might come a situation during audit work when the auditor might
have to be inclined to favor the founding partner. And this put the auditor in the
positing to be unable to attain the objective of the audit. In auditing, we called this
familiarity threat.
In addition, MCA also processes the journal entries, extracts the trial balance, and
prepares the financial report. This relationship creates more independence issue
and potential threat to MCA because auditing its own work lack objectivity and
significant biases to favor its own work. We called this self-review threat in auditing.
SAFEGUARDS
Conceptual Framework for Members in Public Practice serves as an important
document to shed the light on several independence issues and provide a guideline
for auditors if the issue can be reduced or eliminated if possible. 1 It outlines the five-
step process as highlighted in the figure below;
1
Auditing a practical approach with data analytics by Raymond Johnson
,Step 1 has been already discussed in the preceding section. In one step, the second
auditor has to try to evaluate the identified threat. The threat might be material or
non-material. If the threat is so material that the audit objective cannot be achieved
then the auditor should consider step 3. Regarding safeguarding, there are three
general ways. There is some specific safeguard created by the profession
(safeguard suggested in the code). The second is created by the client (the board
considering repressing some key personnel). The third type of safeguard is
implemented by the audit firm itself (involvement of another firm).
OBJECTIVE ASSESSMENT
Now we reached the fourth step in the framework. Here a critical objective
assessment has to be considered. Regarding the case presented the first familiarity
threat can be reduced if the old founder steps away from the board or if MCA
considered hiring another firm to assist during auditing, then only MCA can exercise
some independence and objectivity principles. The second self-review threat cannot
be reduced, and MCA should step away from providing the audit service.
CASE 2
POTENTIAL THREATS TO MCA.
In the given case Dubbo Data is a listed IT company and the wife of the MCA
manager on the engagement recently purchased shares in Dubbo Data on the
advice of her financial planner. This type of situation creates a self-interest threat
which implies MCA could gain some benefit financially or some non-material
consideration like the strong relationship whatsoever by altering the objective
assessment of the opinion on the financial report.
SAFEGUARDS
Conceptual Framework for Members in Public Practice serves as an important
document to shed the light on several independence issues and provide a guideline
for auditors if the issue can be reduced or eliminated if possible. It outlines the five-
step process as the highlighted previous image.
Step 1 has been already discussed in the preceding section. In one step, the second
auditor has to try to evaluate the identified threat. The threat might be material or
non-material. If the threat is so material that the audit objective cannot be achieved
then the auditor should consider step 3. Regarding safeguarding, there are three
general ways. There is some specific safeguard created by the profession
(safeguard suggested in the code). The second is created by the client (the board
considering repressing some key personnel). The third type of safeguard is
implemented by the audit firm itself (involvement of another firm).
OBJECTIVE ASSESSMENT
, The threat identified falls on being a manager to overcome the self-interest threat.
If the audit team finds a way to exclude the manager from the audit project, the
MCA can proceed further. But in practice, it is really hard for the team to exercise
independence and objectivity even if the manager steps away from the audit
assessment. So, MCA should step away from providing the audit service.
CASE 3
THE POTENTIAL THREATS TO MCA.
In the given case Pegg Limited is a listed company that MCA has audited for the
past 5 years. Shane Lund, the auditor in charge, recently purchased units in a
managed investment fund and become top 10 shareholdings. This type of threat
also falls into the self-interest threat. MCA has a significant interest to gain material
gain by artificially boosting the financial report. So they lack objectivity and
independence.
SAFEGUARDS
Conceptual Framework for Members in Public Practice serves as an important
document to shed the light on several independence issues and provide a guideline
for auditors if the issue can be reduced or eliminated if possible. It outlines the five-
step process as highlighted in the previous figure.
Step 1 has been already discussed in the preceding section. In one step, the second
auditor has to try to evaluate the identified threat. The threat might be material or
non-material. If the threat is so material that the audit objective cannot be achieved
then the auditor should consider step 3. Regarding safeguarding, there are three
general ways. There is some specific safeguard created by the profession
(safeguard suggested in the code). The second is created by the client (the board
considering repressing some key personnel). The third type of safeguard is
implemented by the audit firm itself (involvement of another firm).
OBJECTIVE ASSESSMENT.
Since the senior auditor in charge has a significant interest in the client to benefit
financially if the financial report is artificially boosted, the threat is beyond to
overcome so MCA should step away from the audit engagement.
Case 4
THE POTENTIAL THREATS TO MCA.
In the given MCA has been providing the audit to MJP's trust for many years.
Recently, the two firms agreed to combine their collective expertise to set up a
'one-stop shop' for motor vehicle dealers. The new business, called Dealer
