Text PAQ 2.37 Independence threats and safeguards

Required:

(a) Are there any threats to independence for S&A in its audit of MaxSecurity?

(b) Can you propose any recommendations to safeguard S&A against the potential independence threats you have identified? Explain.

(a) 3 clear issues are raised in the case:

(i) The client’s internal audit department is headed by an ex-partner of S&A.

(a) Threats:

Both APES 110 and the Corporations Act place restrictions on audits where a former audit partner has a senior role within the client.

The Corporations Act restriction (CORPORATIONS ACT 2001 - SECT 324CK) is limited to a period of 5 years between leaving the audit firm and the current audit (2 years if the person retired rather than just left the firm s. 324CI). On this basis, there is no contravention of the Act. In addition, the restriction applies to ex-auditors who become an officer of the company. In the case of MaxSecurity, Rydell Creek does not appear to be an officer of the company (e.g. a director or senior manager) – he is the head of the internal audit department.

APES 110.R540.5 (post 2018) or APES 110.290.149 (pre 2018) has restrictions on the time that a person can be a Key Audit Partner for a Public Interest Entity, but it is less restrictive than the Act (7 years). However, the auditor must still consider any threats from familiarity or self-interest.

(b) Safeguards:

Ensure that Rydell Creek is not regarded as able to exert direct and significant influence over the subject matter of the external audit.

Ensure that there wasn’t a significant and personal relationship between Rydell Creek and the other members of the audit team based on their previous association as colleagues (to deal with the general familiarity threat).

APES 110.200.6A1(d) (post 2018) or APES 110.200.7 (pre 2018) Examples of circumstances that may create familiarity threats include, but are not limited to: (extract).

• A former Partner of the Firm being a Director or Officer of the Client or an employee in a position to exert direct and significant influence over the subject matter of the Engagement.

(ii) Clarke Field has been the partner for 5 years and will remain as review partner when Sally Woodrow is appointed as partner for the audit.

(a) Threats:

APES 110 and the Corporations Act require rotation of senior audit personnel. See the section in APES 110 s 290.149 (pre 2018) or APES 110.540 (post 2018) and compare to the CORPORATIONS ACT 2001 - SECT 324DC: Audit firm's rotation obligation.

(b) Safeguards:

Clarke Field should not participate in the audit for two years.

(iii) Appointment of Sally Woodrow to position of partner and as partner in charge of the MaxSecurity audit.

(a) Threats:

Is Sally Woodrow experienced enough to lead the audit? She is being promoted to partner to enable her to take over the audit. If she is not sufficiently experienced and qualified to lead the audit there is a risk that the independence of the audit will be compromised.

(b) Safeguards:

An independent (i.e. not previously involved with MaxSecurity) senior audit partner should be appointed as review partner to assist Sally Woodrow.