You are the audit manager of Currant & Co and you are planning the audit of Orange Financials Co (Orange), who specialize in providing loans and financial advice to individuals and companies. Currant & Co has audited Orange for many years.

The directors of Orange are planning to list it on a stock exchange within the next few months and have asked if the engagement partner at Currant & Co can attend the meetings with potential investors. In addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked if Currant & Co can prepare the financial statements for the current year to later be audited.

During the year, the assistant finance director of Orange left and joined Currant & Co as a partner. It has been suggested that, due to his familiarity with Orange, he should be appointed as the partner on the audit engagement.

Once Orange obtains its stock exchange listing, it will require several assignments to be undertaken, such as obtaining advice about corporate governance best practice. Currant & Co is very keen to be appointed to these engagements; however, Orange has implied that, in order to gain this work, Currant & Co needs to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that, once the stock exchange listing has been completed, he would like the engagement team to attend a weekend away at a luxury hotel with his team, as a thank you for all their hard work. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

Required

a. Explain six ethical threats that may affect the independence of Currant & Co’s audit of Orange. For each threat, explain how it might be reduced to an acceptable level.

b. Orange is aware that subsequent to the stock exchange listing it will need to establish an audit committee and has asked for some advice in relation to this. Explain the benefits to Orange of establishing an audit committee.