Question

Shelly, Kelly & Mark (SKM) are the auditors of Bass, SKM's IT consulting division has undertaken a number of accounts receivable management system implementation projects and is actively looking for opportunities to perform more of this type of work. As a result, SKM's IT consulting division is! planning to submit a proposal to implement an accounts receivables management system at Mass. (a) Identify and explain the two primary threats to independence for SKM. (5 marks) (b) Outline an appropriate safeguard to address each of the threats identified above. (5 marks)

Answer 1

Answer: (a). Independence is an attitude of the mind characterized by objectivity and integrity such that the auditor should be and appear to be free from any interest that will hinder objectivity. Therefore, the auditor should be alert to the danger posed by the threats that hinder objectivity. The following are the two primary threats to independence for SKM: 1. Self-Interest Threat- This threat may arise out of the firm being involved in activities and situations that give rise to the conflict of interest. For instance, a conflict of interests arising from providing other services to the client or the auditors faced with the possibility of receiving a fee that is a significant proportion of their income. 2. Familiarity threat-This is a threat that personal or family relationships can impair their objectivity. This threat may occur when there is a close relationship between a member of the engagement team or immediate a close family member with the client. This threat may cause the auditors to be so sympathetic while carrying out their work because they know them very well. (b). The appropriate safeguard to address each of the threats: 1). The safeguards against self-interest threat include: • Being alert to the danger posed to their independence when providing other services and use different staff for the other services. • They should disclose the interest to both parties and advice to choose another audit firm or disengage one or take full responsibility for their work. 2). The safeguards against familiarity threat include: • The firm can be rotating the audit partners to avoid one audit partner being responsible for the audit of them for long They should ensure that the concemed personnel does not continue to participate in the engagement Involving the services of another consultancy firm to review their work as well as assigning an experienced audit team to carry out the work.