Question

Workshop Auditing exercise.

KMP security Ltd has been an audit client of Maitland Partners for the past 15 years. KMP Security Ltd, an ASX listed company, is based in Roma where it manufactures high-tech security systems. KMP Security’s end of financial year is 30 June, and Maitland Partners is preparing to commence the 2019 audit.

Caryn Marks has been the engagement partner on the KMP Security Ltd’s audit for the past five years. Caryn is a specialist in the security/IT industry and intends to remain as review partner when the audit is rotated next year to a new audit partner (Josh Budd, who is to be promoted to partner to enable him to sign-off on the audit).

In September 2018, KMP Security Ltd installed a new off-the-shelf inventory costing system. This system replaced a system that had been developed in-house, as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.

KMP Security Ltd’s information technology (IT) department, together with the consultants from the software company implemented the new manufacturing costing system. Key operational staff from KMP Security Ltd, together with consultants from the software supplier were significantly engaged in the selection, testing, training and implementation stages. Several customized modifications were made and therefore KMP Security has asked Maitland Partners to provide an estimate of the valuation of the software system.

KMP Security Ltd has a small internal audit department which reports to the Chief Financial Officer (CFO), Alesar Burney, who is an ex-partner of Maitland Partners. Alesar took up the appointment as CFO for KMP Security Ltd in November 2018, after spending two years in early retirement. During his last year at Maitland Partners, Alesar had been the review partner on the 2016 KMP Security Ltd audit. Alesar does not hold any financial interest in Maitland Partners, having been paid out his capital on retirement. Further, Alesar has not remained in contact with any of the remaining partners since his departure from the audit firm, with the exception of Josh Budd, whom he had mentored in his early career.

Question:

You are required to identify and discuss any issues that could give rise to potential threats to independence for Maitland Partners in their audit of KMP Security Ltd. (this question is for Auditing weekly Homework)

Answer 1

As per SQC 1 every auditor must adhere to Independence principle while discharging any attest function.

Following are the issues that could give rise to potential threats to independence for Maitland Partners in their audit of KMP Security Ltd:-

1. the given case KMP Security has asked Maitland Partners who happen to be their Statutory Auditors to provide an estimate of the valuation of the newly developed software system :-

Since being the Statutory/External Auditor of the KMP Security the Maitland Partners shall refuse to accept such assignment as they are prohibited under the Standards on Auditing and under the Law governing the Company. As an Valuer of the Intangible Asset they might by influenced by the Management of the KMP Security and give Valuation report under the influence of the management which is well against their principle of the Independent Auditor.

2. Internal audit department which reports to the Chief Financial Officer (CFO), Alesar Burney, who is an ex-partner of Maitland Partners:-

CFO being the review partner of the company in the past Two years is also a threat to the independence of Auditor. Ideally there should be a cooling off period of at least 5 years before which an person associated with auditor shall be appointed with as Key Managerial Person in a Company. As Mr. Alesar Burney was the review partner he might be well versed with compnay's affairs and can easily disguise the present auditors.

Thus there exist several Independence threat as discussed above.