The following scenario relates to questions 11–15
Sycamore & Co is the auditor of Fir Co, a listed computer software company. The audit team comprises an engagement partner, a recently appointed audit manager, an audit senior and a number of audit assistants. The audit engagement partner has only been appointed this year due to the rotation of the previous partner who had been involved in the audit for seven years. Only the audit senior has experience of auditing a company in this specialised industry. The previous audit manager, who is a close friend of the new audit manager, left the firm before the completion of the prior year audit and is now the finance director of Fir Co.
The board of Fir Co has asked if Sycamore & Co can take on some additional work and have asked if the following additional non-audit services can be provided:
(1) Routine maintenance of payroll records
(2) Assistance with the selection of a new financial controller including the checking of references
(3) Tax services whereby Sycamore & Co would liaise with the tax authority on Fir Co’s behalf
Sycamore & Co has identified that the current year fees to be received from Fir Co for audit and other services will represent 16% of the firm’s total fee income and totalled 15·5% in the prior year. The audit engagement partner has asked you to consider what can be done in relation to this self-interest threat.
In relation to the composition of the current audit team, which of the following correctly identifies the fundamental principle which is at risk and provides an appropriate safeguard?
Fundamental principle Safeguard
The fundamental principle at risk is professional competence as many of the audit team are new and do not have relevant experience in relation to the specialised industry in which Fir Co operates. It is not appropriate to reinstate the previous partner as in line with the ACCA Code of Ethics and Conduct, the previous partner has been rotated after seven years to prevent a familiarity threat. The audit firm should offer appropriate training for the audit team to ensure they have the necessary knowledge to carry out the work.
Which of the following identifies the threat which could arise as a result of the finance director’s previous employment at Sycamore & Co and recommends an appropriate safeguard?
As the previous audit manager has taken up employment with the client as the finance director, there is a familiarity threat due to the ongoing relationship between the old and new audit manager. The familiarity threat is not so severe that the firm would need to resign but a new audit manager should be appointed.
Ignoring the potential effect on total fee levels, which of the following options correctly identifies the threats to independence from providing the above non-audit services?
Self-review Self-interest Advocacy
As per the ACCA Code of Ethics and Conduct, the following threats would be created from carrying out the non-audit services requested by Fir Co:
Payroll – Self-review as the auditor will also be involved in auditing the figures included in the financial statements in relation to wages and salaries.
Recruitment – Self-interest as the auditor would be involved in selecting an officer of the company who has significant influence over the financial statements.
Tax – Advocacy as the auditor may be perceived to be representing and promoting Fir Co’s interest in liaising with the tax authority.
Which of the following safeguards would NOT be relevant in mitigating the threat identified in relation to fees?
Using separate teams will not address the self-interest threat from the fee levels as separating the teams will not alleviate the firm’s potential financial dependence on Fir Co and therefore the risk that work is not carried out independently for fear of the losing the client.
During the course of the audit of Fir Co, a suspicious cash transfer has been identified. The audit team has reported this to the relevant firm representative as a potential money-laundering transaction.
Which of the following statements is true regarding the confidentiality of this information?
As per ACCA Code of Ethics and Conduct 140.7.b – Confidential information may be disclosed when such disclosure is required by law.