SUGGESTED SOLUTION Auditing 3A MAY 2017 EXAM UNIVERSITY OF ZULULAND RESTRUCTURED FOR RELEVANCE Accountancy @Unizulu FACULTY OF COMMERCE, ADMINISTRATION AND LAW DEPARTMENT OF ACCOUNTING AND AUDITING AUDITING 3A CADD 301 CAUD 301 MAY EXAM 2017 SUGGESTED SOLUTION 60 MARKS Question 1 1
MAY 2017 EXAM SUGGESTED SOLUTION Auditing 3A (a) Discuss the threats to your firm's independence highlighted by your review and any possible safeguards that your firm could implement in the circumstances. M 1. There is a self-review threat concerning independence by the firm performing various consulting and internal audit services for Eh-Yadini. 1 2. This threat is exacerbated by the nature of the consulting services rendered which include work on the financial statements. 1 3. The firm is involved in advising management regarding internal controls, processes and significant decisions (through internal audit and other means i.e. looking at the 70% non-audit services fees). 1 1 4. The threat is clearly significant and appropriate safeguards need to be put in place. 1 5. Performing consulting and internal audit services function might also create a self- interest threat to independence and objectivity as the non-audit fee revenue as a percentage of total revenue from the client is excessive in relation to the audit fees (R300 000 vs R200 000) 1 1 1 6. These threats affect the client acceptance of Eh-Yadini significantly. They would 1 1 need to have been considered carefully by the audit firm during the pre-engagement activities and safeguards applied at that time. 1 7. A possible safeguard is for the new audit committee to approve all non-audit services that can be performed by the firm. The audit committee needs to perform an evaluation of the independence of the newly appointed audit firm. 1 8. If the firm is approved to continue as auditors, the firm would need to strictly manage the allocation of staff members on the audit to ensure these members are independent (i.e. separating the advisory, internal and external audit services). 1 1 9. The firm would need to consult its policies and procedures regarding clients where audit and advisory services are provided, for possible safeguards. 1 1 10. As the audit firm is small and because of the likely structure and operational management of the (small) audit firm, the threat to independence (especially appearance) might not be adequately reduced by resource allocation management. 1 11. If the firm wishes to accept the Eh-Yadini as an audit client, they would need to significantly reduce the amount of consulting work performed for the client to a 1 level that can be acceptable and that does not compromise on their independence. If they are not willing to do this, the audit should not have been accepted. 1 2 12. It is not considered that members of the audit firm "occasionally" visiting Eh-Yadini gives rise to a significant threat to independence (familiarity). Other valid points (each) 1 Total available 2 2 Maximum 1 0 (b) Other considerations your firm should have borne in mind in deciding to