The following scenario relates to questions 1–5
You are an audit manager at Horti & Co and you are considering a number of ethical issues which have arisen on some of the firm’s long-standing audit clients.
Tree Co Horti & Co is planning its external audit of Tree Co. Yesterday, the audit engagement partner, Charlie Thrower, discovered that a significant fee for information security services, which were provided to Tree Co by Horti & Co, is overdue. Charlie hopes to be able to resolve the dispute amicably and has confirmed that he will discuss the matter with the finance director,
Percy Marsh, at the weekend, as they are both attending a party to celebrate the engagement of Charlie’s daughter and Percy’s son. Bush Co
Horti & Co is the external auditor of Bush Co and also provides other non-audit services to the company. While performing the audit for the year ended 31 October 20X8, the audit engagement partner was taken ill and took an indefinite leave of absence from the firm. The ethics partner has identified the following potential replacements and is keen that independence is maintained to the highest level:
Brian Smith who is also the partner in charge of the tax services provided to Bush Co
Monty Nod who was the audit engagement partner for the ten years ended 31 October 20X7
Cassie Dixon who introduced Bush Co as a client when she joined the firm as an audit partner five years ago
Pete Russo who is also the partner in charge of the payroll services provided to Bush Co
Plant Co is a large private company, with a financial year to 30 June, and has been an audit client of Horti & Co for several years. Alan Marshlow, a partner of Horti & Co, has acted as the engagement quality control reviewer (EQCR) on the last two
audits to the year ended 30 June 20X8. At a recent meeting, he advised that he can no longer be EQCR on the engagement as he is considering accepting appointment as a non-executive director and will sit on the audit committee of Plant Co.
The board of directors has also asked Horti & Co if they would be able to provide internal audit services to the company.
Weed Co, a listed company, is one of Horti & Co’s largest clients. Last year the fee for audit and other services was $1·2m and this year it is expected to be $1·3m which represents 16·6% and 18·1% of Horti & Co’s total income respectively.
1 Which of the following statements correctly explains the possible threats to Horti & Co’s independence and recommends an appropriate safeguard in relation to their audit of Tree Co?
(1) An intimidation threat exists due to the overdue fee and Tree Co should be advised that all fees must be paid prior to the auditor’s report being signed
(2) A self-review threat exists due to the nature of the non-audit work which has been performed and an engagement quality control review should be carried out
(3) A self-interest threat exists due to the relationship between Charlie and Percy and Charlie should be removed as audit partner
A 1, 2 and 3
B 1 and 2 only
C 2 only
D 3 only
2 Taking into account the concern of the ethics partner, which of the partners identified as potential replacements should take over the audit of Bush Co for the year ended 31 October 20X8?
A Brian Smith
B Monty Nod
C Cassie Dixon
D Pete Russo