Canterlot Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Australia. During 2020 Canterlot gained a new client, Cloudsdale Medical Group (CMG), which owns 100 per cent of the following entities:

• Everfree Forest Hospital, a private hospital group

• Calendula Care Pty Ltd, a private nursing home

• Tempo Cancer Treatment Limited (TCTL), a private oncology clinic that specialises in the treatment of cancer.

Year-end for all CMG entities is 30 June.

TCTL owns two relatively old linear accelerators used in radiation therapy. Recently, radiographers using these linear accelerators have raised concerns that they have adverse radiation impacts on patients.

The CEO of TCTL, Teya Betts, has approached Jade Bailey, the audit partner responsible for the financial report audit, about undertaking an engagement in respect of the linear accelerators. Teya has requested Jade provide an opinion that the linear accelerators are fit for use. Teya pointed out that the TCTL audit is up for tender the following year and suggested Canterlot might like to take on the linear accelerators engagement without charging a fee as a gesture of goodwill.

Prior to the appointment of Canterlot as the auditor for the group that controls TCTL, CMG, for the 2020 financial year, some preliminary analysis by Jade Bailey identified the following situations:

1. One of the accountants intended to be part of the 2020 audit team owns shares in CMG. The accountant’s interest is not material to him.

2. Canterlot was previously engaged by CMG to value its intellectual property. The consolidated balance sheet (statement of financial position) as at 30 June 2020 includes intangible assets of $30 million, which were valued by Canterlot on 1 March 2020 following CMG’s acquisition of the subsidiary Everfree Forest Hospital. The intangibles are considered material to CMG.

(a) Using your knowledge of APES 110, identify and explain the potential type of threat to Canterlots’ independence in situations (1) and (2).

(b) What action should Canterlot take to eliminate the potential threats to independence in situations (1) and (2)? What safeguards should be instituted to reduce the risk of similar independence threats occurring in the future?