June 2012 #3

Hello sir, I am having some problems with Part (b) of this question.

I got the fact that by having the audit engagement partner attend the meeting with potential investors create an advocacy threat. I also got the fact that by Current & Co (the audit firm) preparing and auditing the financial statements creates a self-review threat. I also got the holiday and also the loan at a lower rate creates a self-interest threat.

Problem 1:

The assistant finance director left Orange and joined Currant and Co as partner and then eventually became the independent partner for reviewing the audit of Orange.

Here was what I wrote:

Threat- the Finance Director’s assistant left during the year and eventually became the independent partner to review the audit of Orange. If the audit firm prepares and audits the financial statements of Orange, then the Finance Director assistant who is now the independent partner to review the audit can conceal issues identified so that both the audit firm can benefit from having extra income as a result of listing and the need for advice on corporate governance best practice and the client by obtaining their listing. (Collusion)

Safeguard: the finance director’s assistant should be replaced by someone else who is actually really more independent because of his familiarity with Orange (the client).

Will I get this wrong?

Problem 2:

Another problem I had with the examiner’s answer is about the audit firm needing to complete the external audit quickly and with minimal questions/issues.

Here is what I wrote:

Threat: If the audit firm is to obtain extra assignments they must complete the audit quickly and with minimal questions/issues. This is a form of self-interest/contingency threat as the firm does not want to lose out on the extra income from performing these additional assignments.

Safeguard: this is prohibited by the ACCA and safeguards include sufficient and appropriate time was allocated to the audit and quality control reviews.

*Overall it seems to me that the firm is somehow interested in fees and the client is interested in obtaining the listing. It seems as though there is some form of collusion which satisfies both parties with the end result of Orange getting their listing hopefully.

Will I get this wrong?