Part B The audit engagement partner for Goofy Co. has been in place for approxim
ID: 2579870 • Letter: P
Question
Part B The audit engagement partner for Goofy Co. has been in place for approximately six years and her son has just accepted a job offer from Goofy Co. as a sales manager; this role would entitle him to shares in Goofy Co. as part of his remuneration package Goofy Co.'s year end s 31 December, which is traditionally a busy time for NAB & Co. Goofy Co. currently has an internal audit department of five employees but they have struggled to undertake the variety and extent of work required by the company hence Goofy Co. is considering using NAB & Co. to provide the internal audit services as well as remain as external auditors. If NAB & Co. is appointed as internal as well as external auditors, then Goofy Co. has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of NAB & Co. and Goofy Co. Discussion Explain the ethical threats which may affect the independence of NAB & Co. in respect of the audit of Goofy Co., and for each threat explain how it may be reduced.Explanation / Answer
Ethical threats and managing these risks
Ethical threat Managing risk A familiarity threat arises when an engagement partner is associated with a client for a ling period of time. NAB & Co.'s partner has been involved in the audit of Goofy Co. for six years and hence may not maintain her professional skepticism and objectivity. NAB & Co. should monitor the relationship between engagement and client staff, and should cosider rotating engagement partners when a long association has occured. In addition ACCA's code of ethics and conduct recommends that engagement partners rotate off an audit after five years for listed and public interest entities. Therefore consideration should be given to appointing an alternate audit partner. The engagement partner's son has accepted a job as a sales manager at Goofy Co. This could represent a self-interest/familiarity threat if the son was involved in the financial statement process. It is unlikely that as a sales manager the son would be in a position to influence the financial statements and hence additional safeguards would not be necessary. A self-interest threat can arise when an audit firm has a financial interest in the company. In this case the partner's son will receive shares as part of his remuneration. As the son is an immediate family member of the partner then if he holds the shares it will be as if the partner holds these shares, and this is prohibited. In this case as holding shares is prohibited by the ACCA's code of ethics and conduct that either the son should refuse the shares or more likely the engagement partner will need to be removed from the audit. Fees based on the outcome or results of work performed are known as contingent fees and are prohibited by ACCA's code of ethics and conduct. Hence Goofy co.'s request that 20% of the external audit fee is based on profit after tax would represent a contingent fee. NAB & Co. will not be able to accept contingent fees and should communicate to Goofy Co. that the external audit fee needs to be based on the time and level of work performed.