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.
3. Which of the following correctly identifies the threats to Horti & Co’s independence and proposes an appropriate course of action for the firm if Alan Marshlow accepts appointment as a non-executive director of Plant Co?
Threats Course of action
A Self-interest and familiarity Can continue with appropriate safeguards
B Self-interest and self-review Must resign as auditor
C Self-review and familiarity Must resign as auditor
D Familiarity only Can continue with appropriate safeguards
4. You are separately considering Plant Co’s request to provide internal audit services and the remit of these services if they are accepted.
Which of the following would result in Horti & Co assuming a management responsibility in relation to the internal audit services?
(1) Taking responsibility for designing and maintaining internal control systems
(2) Determining which recommendations should take priority and be implemented
(3) Determining the reliance which can be placed on the work of internal audit for the external audit
(4) Setting the scope of the internal audit work to be carried out
A 1 and 3
B 2, 3 and 4
C 1, 2 and 4
D 3 and 4 only