Question

Case Study 2 It was during the beginning of 2019 that the FLY Airlines Company (hereafter the FLY Airlines) appointed PMG Auditing Company (hereafter PMG) to undertake the statutory audit of financial statements of the company. While planning for a change, FLY airlines contacted many auditing firms and finally selected the PMG. One of the board members of FLY airlines is also part of the PMG, as one of their investors. So, FLY airlines considered that PMG can provide a better auditing service compared to other auditors. As FLY airlines considered PMG as their subsidiary concer, they also provided 20% discount for PMG staff for traveling in FLY airlines. Considering the situation, PMG management assigned four of its junior staff members to conduct the audit of FLY airlines. They were also informed that, in case of any discrepancy in the accounting statements, it has to be informed to the senior auditor in the PMG, who will then address these discrepancies with the airline's management team. One of the reasons behind assigning junior auditors in completing the audit services is the fact that PMG was also involved in setting up an accounting system for the airlines. Hence, the PMG management knows that there are less chances of errors, as the system is set in such way to signal errors as and when it happens. However, the accounting system is not capable of detecting willful fraudis in the process. As the Airline sector is undergoing tremendous pressure from the shareholders, the CFO believed that the contact with PMG management will help them to project a better revenue for the company. During 2015, when the FLY Airlines raised funds through public issue, PMG bought 15% of FLY airline shares, which currently is trading at a market price of OMR32.5. The share price is expected to grow, if the company reports a growth in their profitability indicators. 1. Based on the above case, answer the following: (Maximum word count for Case Study is 400 Words) (4+4+2 = 10 Marks) Identify and explain the various threats which may affect the independence of PMG in auditing FLY Airlines Do you think the various threats faced by PMG are in acceptable Level? If you are an employee in the PMG, how do you evaluate the risks involved? What do you suggest? Should PMG accept the offer for auditing FLY Airlines? 2. 3.

Answer 1

1. Various Threats which may affect the independence of PMG in Auditing FLY Airlines are:
Self Interest Threat	: Because here PMG having financila interest in the company through BOD of Airlines company, due to which, their Consultancy charges may not be recovered properly.
Self Review Threat	: Chnaces are quite high, as as per scenarion juniors are evaluating the work of the PMG work did earlier about setting up of accounting process within the client business.
Advocacy Threat	: enaged in two different opposite projects of the same client itself. Like auditing the financial as well as appointed for determining the whetehr company need to be merged or sold to other company.
Familiarity Threat	: BOD in the company is of the PMG company. A relationship established, it casue hinderence in meeting objectivity.
Intimidation Threat	: Management of the Company may threatens over the rotation removal of PMG auditors if report is not as per their requirement.

2. No, the risk are not at acceptable level, because the risk which is for independency of an Auditors has to be nil in order to carryon the audit. Becasue these risk seems small while at initial stage but later on becomes add " scope of limitation" over the audit work. Here in the scenario, the appointment of PMG as Auditor for the system implementation is itself PMG, suppose if any where the system unable to detect the fraud or wilfull misrepresentation, then chances rae very less that same will be reported during the current audit assignment as implementation of the system is being done by the same auditee, or chances will be also that junior auditor may overlook the audit assignments on the belief that system is being implemented by PMG itself so chances of frauds or misrepresentation is less. So, from this we can conclude that Risk is not at all at Acceptable level.

3. It is suggested that Airlines may conduct the process audit ( involves the implementationof Accounting system in place) from another party and secondly another audit may be conducted by PMG provided that particular Director will not be allowed to represent in the meeting related with PMG auditee during the tenure of Audit period. Through this only they are able to control the independece level.