ACCA F8 - Audit and Assurance Revision Kit 2016

Ethical threat
Current & Co have been asked to produce the
financial statements of Orange Financials Co.
This represents a possible self-review threat as
Currant & Co would be both preparing and auditing
the same information.
As Orange Financials Co is not a listed company the
preparation and audit of financial statements is not
prohibited by ethical standards. However the
company is in the process of seeking a listing which
increases audit risk as it is likely that potential
investors will rely on these financial statements to
make investment decisions.
The assistant finance director of Orange Financials
Co has joined Currant & Co as a partner and it has
been suggested that he should be the independent
review partner.
This represents a self-review threat as the same
individual would be responsible for reviewing the
audit of financial statements which he has been
involved in preparing.
Current & Co would like to conduct other
assignments for Orange Financials Co.
This gives rise to a potential self-interest threat as
the total fees generated from this client may form a
substantial proportion of the fees of the firm which
may have an impact on the firm's objectivity.
Orange Financials Co has indicated that the other
work will only be awarded to Currant & Co if it
completes the audit with minimal issues.
This gives rise to an intimidation threat as the audit
team may feel under pressure not to perform a
thorough audit in order to comply with this request.
The audit team has been offered a luxury weekend
away once the stock exchange listing has been
completed.
This represents a self-interest threat as the
independence of the audit team may be affected by
their wish to go on the holiday.
How it might be reduced
As the company is in the process of obtaining a
listing the threat to independence may be assessed
as too high if Currant & Co both prepares and
audits the financial statements.
If Currant & Co does choose to prepare the financial
statements it should ensure that there are two
separate teams, one which prepares the financial
statements and one which performs the audit.
This individual must not be involved in the audit of
Orange Financials Co and another partner should be
appointed as the review partner.
The other work will only be available when Orange
Financials Co obtains its listing. The company will
then be a public interest entity so Currant & Co will
need to consider whether the these additional fees
together with existing fees represent 15% of the
firm's total fees for two consecutive years. Where
this is the case disclosure must be made to those
charged with governance and a review (pre or post
issuance) must be conducted .
The audit partner should explain to the finance
director that the firm is required to perform the
audit in accordance with auditing and quality
control standards. As a result all relevant issues and
questions will have to be investigated thoroughly in
order to obtain sufficient appropriate evidence to
form the audit opinion. The length of time this will
take cannot be guaranteed.
If the finance director is unwilling to accept this and
continues to put undue pressure on Currant & Co
the firm should consider resigning from the
engagement.
As the value of the hospitality is unlikely to be
inconsequential no safeguards would be adequate
to reduce the threat to an acceptable level. The offer
of the weekend away should be declined politely.
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