a. According to the provided information, Jane Davis, the accountant of Thornleigh Accountants, has replaced the senior accounts manager of Jenkins Limited, Leona Ng. This is because Leona Ng has fallen ill, due to which the organisation has asked its audit partner Thornleigh Accountants to provide a staff member on secondment. Such situation could be related to the relationship threat of independence. As commented by Abbott et al. (2016), relationship threat is broad, which would cover anything that includes the auditor knowing the trustees, members or accountants personally. In case, a close family or business relationship with a member of the client is inherent, independence could not be accomplished for the audit client. Due to such nature, it has become an issue, which ATO needs to pay close attention.
In addition, the case study clearly states that after completing four months in Jenkins Limited, Jane Davis has left the organisation. In the meanwhile, Thornleigh Accountants is going to audit Jenkins Limited, in which it is planning to include Jane Davis as a part of the audit team. Such situation might lead to self-review threat to the independence of the auditor, as Jane Davis has prepared some of the accounting work for the client. This threat could be addressed by separating the accounting and auditing work between two separate teams operating independent of each other (Blay and Geiger 2013). Hence, the major threats to the independence of the auditor in this specific case are relationship threat and self-review threat.
b. Based on the provided information, it could be evaluated that John Darrow, the audit manager of the Darrow Associates Accountants, has obtained accounts from Winmalee Limited. At the time of preparing the accounts, the organisation has undertaken an optimistic approach for valuing development expenditure capitalised in intangible assets. As the audit manager is requested to review the financial statement preparation of the organisation, it might lead to advising threat to the independence of the auditor. This is because the auditor is engaged in providing financial advice to the client (DeFond and Zhang 2014).
While evaluating the accounts of the organisation, it has been found that the senior staff bonuses are associated with the profit performance of the organisation and the organisation has supplied the paper copies of details regarding various standards of accounting. This raises the question as to whether the audit firm could carry out its operations independently, since accounting-related work is involved as well (Dhaliwal et al. 2015).
Moreover, the organisation has provided computer files with reports to the audit manager, which signifies sympathetic approach in relation to asset valuation. Thus, the auditor is provided with sensitive and internal data associated with the financial accounts of the organisation, which would be a difficult situation to conduct independent audit. This is because carrying out both accounting, auditing work for an organisation might lead to advising threat, and hence, this might result in a biased opinion.
c. The provided information clearly states that the Chocolate Company has requested the audit firm to conduct the audit firm of its financial statements. The organisation has invited the audit firm to visit its second chocolate shop, in which it sells defective chocolates at a significant discount prior to the audit completion. In this case, the major threat to the independence of the auditor is self-interest threat. This is because the organisation represents a significant portion of the business of the audit organisation (Dogui, Boiral and Heras?Saizarbitoria 2014).
Moreover, it has been identified that the Chocolate Company has invited the members of the firm to join the social club of the organisation. If the members join the club, they might be obliged indirectly to the Chocolate Company to act as per its interest. Moreover, their self-interest would be served, if they join the social club of the organisation. Such situation would lead to threat of independence to the auditor, since it would not be able to issue qualified audit opinion (Kouakou, Boiral and Gendron 2013). This might cause problem for the client and the ATO, as unqualified audit opinion might lead to incorrect evaluation of the financial reports. Such situation might mislead the investors, shareholders and other users about the current financial position of the organisation. In addition, if the audit firm does not accept the invitation of the Chocolate Company, it might lead to loss of client for the former. Hence, the main threat identified for this particular situation is the self-interest threat to the independence of the auditor.
References:
Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), pp.3-40.
Blay, A.D. and Geiger, M.A., 2013. Auditor fees and auditor independence: Evidence from going concern reporting decisions. Contemporary Accounting Research, 30(2), pp.579-606.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting and Economics, 58(2), pp.275-326.
Dhaliwal, D.S., Lamoreaux, P.T., Lennox, C.S. and Mauler, L.M., 2015. Management Influence on Auditor Selection and Subsequent Impairments of Auditor Independence during the Post?SOX Period. Contemporary Accounting Research, 32(2), pp.575-607.
Dogui, K., Boiral, O. and Heras?Saizarbitoria, I., 2014. Audit fees and auditor independence: The case of ISO 14001 certification. International Journal of Auditing, 18(1), pp.14-26.
Kouakou, D., Boiral, O. and Gendron, Y., 2013. ISO auditing and the construction of trust in auditor independence. Accounting, Auditing & Accountability Journal, 26(8), pp.1279-1305.
