ACCA F8 - Audit and Assurance Revision Kit 2016

Tutorial note: There are a number of examples you could have stated for each threat category, however only
one of each was needed.
(b)
(i) Ethical threat rising
The audit team have previously been offered a 10%
discount on luxury phones from LV Fones (LV)
which will potentially have a high value. As only
goods with a trivial and inconsequential value can
be received, if the same discount is again offered, it
will constitute a self-interest threat.
An audit senior was seconded to LV to over the
financial controller role for three months during the
year. The audit senior probably prepared a
significant proportion of the records to be audited;
this creates a self-review threat as he will review his
own work during the audit.
The fee income from LV is 16% of Jones & Co's
total fees. If, after accounting for non-recurring fees
such as the secondment, it remains at this
percentage of total fees on a recurring basis there is
likely to be a self interest threat because of undue
dependence on this client. Where recurring fees
exceed 15% for listed companies, objectivity is
impaired to such an extent that mandatory
safeguards are needed according to the ACCA Code
of ethics and conduct (ACCA Code).
The partner and finance director of LV have been on
holiday together and appear to have a longstanding
close relationship. This results in a familiarity and
self interest threat. Both are senior in their
respective organisation and any onlooker would
perceive independence to be threatened.
The overdue fees (20% of the total fee) may be
perceived as a loan which is prohibited, but may
also create a self-interest threat. This is because
Jones & Co may be less robust than they should be
when it disagrees with management out of fear they
may not recover the fees.
(ii) How threat may be avoided
The offer for the discount should be declined if the
value is significant.
Only if it turns out the senior was only involved on
areas unrelated to the financial statements being
audited should be allowed to remain on the audit
team, otherwise he should be removed from the
assignment to avoid the threat to independence.
The firm should consider whether the further work
should be accepted and also consider appointing an
external quality control reviewer. Going forward, the
firm needs to assess the recurring fee position for
LV and consider refusing further offers of work
where this will take them over the 15% threshold. If
the threshold is breached for two consecutive years
the threat can be mitigated by applying the
mandatory safeguards of disclosing the position to
the board and arranging an independent preissuance
or post-issuance engagement review.
Ideally the partner should be rotated off the audit
and replaced with another partner.
The reasons for non payment should be
determined, and if possible an agreement reached
whereby LV repays the fees prior to the
commencement of any further audit work.
(c)
Steps prior to accepting a new audit engagement
Ensure that there are no independence or other ethical problems likely to cause conflict with the ACCA Code
and other applicable ethical guidelines.
Ensure the firm is professionally qualified to act, considering whether the firm may be disqualified on legal
or ethical grounds
Ensure the firm's existing resources are adequate, including consideration of available time, staff and
technical expertise
Communicate with present auditors having obtained the client's permission and enquire whether there are
reasons/circumstances behind the change which the new auditors ought to know.
Answers 67