Exemplar Acct 3000_Assignment 1_semester 2, 2016

Write your response to the following situations described below addressing the required
criteria (i.e. a, b and c). You may use a tabulated format if helpful having “Threats”,
“Safeguards” and “Objective Assessment” as column headings.
The following situations involve Abraham Lincoln, an audit partner with the accounting firm of
Joyce & Mark. He is involved with the audit of Dockland Ferries Ltd (Dockland).

1. Abraham Lincoln’s wife, Sarah Michaels, recently accepted a loan from Dockland which
is material to Abraham Lincoln, Sarah Michaels, and Dockland.

2. The audit partner Abraham Lincoln’s first cousin, Sophie Hanks, recently purchased
considerable shares of significant value in Dockland, which is material to Sophie, on the
advice of her financial planner.

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3. The assistant accountant of Dockland resigned 6 months ago and has not been replaced.
As a result, Dockland’s transactions have not been recorded and the accounting records

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are not up to date. To comply with the terms of the loan agreement, Dockland needs to
prepare interim financial statements but cannot do so until the records are up to date. The

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managing director of Dockland wants Abraham to help them out because he performed
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the audit last year. Abraham agrees to help out Dockland for 1 month before the start of
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the annual audit.

4. Abraham Lincoln recently purchased a large number of shares in Zalcoa Limited, a

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mining firm. The director of Dockland, Liam Neeson, is also known to have a large
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investment in Zalcoa Limited.

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5. Abraham Lincoln’s wife, Sarah Michaels, recently purchased shares in Dockland on

the advice of her financial planner.
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Required
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For each of the independent situations above, and using the conceptual framework in APES 110
(Code of Ethics for Professional Accountants) , answer the following questions:

(a) Identify potential threats to independence.

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(b) Recommend safeguards to reduce the independence threats.

(c) Provide an objective assessment of whether audit independence can be achieved.

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 Solution:

S.No (a) Threats (b) Safeguards (c) Objective assessment

1. Self-interest threat:
If an immediate family
member of an individual
working on the audit team
accepts a loan from an audit
client that is not a bank or
similar institution, then as per
APES 110.290.120 a self-
interest threat is created. In
the given situation, the audit
engagement partner Abraham
Lincoln’s wife (immediate
As per APES 110.290.120, if
an immediate family member
of an individual working on
the audit team accepts a loan
from an audit client that is not
a bank or similar institution,
the self-interest threat created
would be so significant that
no safeguards could reduce
the threat to an acceptable
level.
In this case independence
has been compromised
since the loan accepted is
material to both (a) the
member of the audit team
(Abraham Lincoln) and
the immediate family
member (Sarah Michaels),
and (b) the client firm
(Dockland)
(APES 110.290.120).

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family member as per section

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9 of the Corporations Act

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2001), Sarah Michaels,

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recently accepted a loan from
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the client firm Dockland
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which is not a bank or a
similar institution.
2 Self-interest threat: As per APES 110 para.
Examining the nature of
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The audit partner Abraham 290.105, where a member of

the relationship between
Lincoln’s close family the assurance team has a close
Abraham Lincoln and
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member Sophie Hanks has a family member who the audit

Sophie Hanks and
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direct financial interest team member knows has a

evaluating the materiality
(shares) in Abraham’s audit direct financial interest in the
of the financial interest to
client (APES 110 para. audit client, the only available
Sophie Hanks, the self-
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290.105). safeguards are:

interest threat appears to
 the close family member
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be significant (APES
110.para 290.105). As per
disposes, as soon as
Apes 110 para. 290.105,
practicable, all of the
independence can be
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financial interest; or
achieved by:
 having a member view the  having Sophie to
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work of the member of the dispose, as soon as

3 Self-review threat:
The audit partner Abraham entity. It is documented in qualify
audit team; or practicable, all of the
financial interest; or
 removing the individual  having a member
from the audit team. review the work of
Abraham Lincoln; or
 removing Abraham
Lincoln from the audit
team.
Dockland is a public interest This activity does not
under the

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 Lincoln who is involved with
the audit of Dockland Ferries
Ltd (Dockland) provides the
audit client with accounting
and book keeping services,
such as preparing accounting
records and/or financial
statements. This creates a
self-review threat when the
firm subsequently audits the
financial statements (APES
110 para. 290.165).
APES 110.290.169 that a firm
shall not provide to an audit
client that is a public interest
accounting and bookkeeping
services including the
preparation of financial
statements in which the firm
will express an Opinion or
financial information which
forms the basis of financial
statements. Moreover, since
during the period covered by
the audit report, the audit
partner Abraham Lincoln
works as an audit critical
exceptions mentioned
under sections 290.166,
290.167, and 290.170 of
APES 110 and creates a
threat to the independence
of Abraham Lincoln. The
threat created is so
significant that no
safeguards are available.
The only option is to not
assign Abraham to the
Audit Team (APES
110.290.142 and APES
110.290.169).

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employee with a position to

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exert significant influence

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over the preparation of the

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client’s accounting records or

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which the firm will express an
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opinion, the threat created is
so significant that no
safeguards could reduce the
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threat to an acceptable level

(APES 110 para 290.142).
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4 Self-interest threat, The significance of any threatIndependence is unlikely

familiarity threat or shall be evaluated based on to be achieved since the
intimidation threat: role of the professional on the
audit partner has
audit team, type of ownership significant investments in
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The audit partner Abraham structure, ability of the Zalcoa limited, thereby
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Lincoln has a financial investor to control or

suggesting his financial
interest in Zalcoa Limited significantly influence the interest to be material.
when the Director of the audit entity and the materiality of Other factors that can also
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client, Liam Neeson, is also financial interest (APES

be looked at to determine
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known to have a financial 110.290.113). The safeguards whether independence can

interest in Zalcoa Limited
(APES 110.290.113)
that can be applied to or can’t be achieved
eliminate the threat or reduceinclude ownership
it to an acceptable level structure of the entity and
include (APES 110 para. the investor’s ability to
290.113) control and significantly
influence the entity (APES
 Removing the member of 110. 290.113)
the audit team with the
financial interest from the
audit team.
 Having a member review

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5 Self-interest threat:
The audit partner’s wife
Sarah Michaels has a direct
financial interest (shares) in
one of her husband’s audit
clients (APES 110 para.
290.104).
the work of the member of
the audit team.
As per APES 110 para
290.104, where the immediate
family member (e.g. spouse as
per the definition in section 9
of the Corporations Act 2001)
of a member of the assurance
team has a direct financial
interest in the assurance
client, the self-interest threat
created would be so
significant that no safeguards
could reduce the threat to an
acceptable level.
In this case independence
cannot be achieved. The
threat created is so
significant that no
safeguards are available.
In circumstances where
appropriate safeguards are
not available or cannot be
applied, the Member shall
decline to perform the
Professional Service or
discontinue the
engagement (APES 110

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para 290.104).

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References: rs e
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Chartered Accountants Australia and New Zealand (CAANZ). 2016. Auditing, Assurance
and Ethics Handbook. Milton, Queensland, Australia: John Wiley & Sons Australia
Ltd.
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