2. AUDITOR INDEPENDENCE

Integrity Accountants (IA) was established in 2001 and has three partners.IA undertakes the full range of accounting services, including tax compliance, consulting, and auditing.It also provides investment advice to a number of high-wealth retired farmers who are clients of the firm. The firm's annual revenues are around $2.4 million, of which approximately 10 per cent relates to audit work.

IA's largest audit client is Jimmy Tew (JT), a manufacturer and retailer of women's shoes.JT is owned by Claude Tows. When Claude established JT in 2003, she engaged IA to provide business advice, and to prepare JT's annual financial statements and tax returns.

In 2008, the bank required that JT's financial statements be audited as a condition of providing additional debt finance. At that time, JT employed a full-time accountant who completes the company's financial statements and taxation returns.

IA has been JT's auditor since 2008.IA continues to provide business and taxation advice to JT, but does not prepare JT's financial statements or taxation returns.Last year, IA charged JT $36,000 for the annual audit, and a further $15,000 for other advisory services.

Since her business is prospering, Claude is considering listing her company on the NZ Stock Exchange. She recently engaged IA to provide advice on how to go about this, and to prepare the investment prospectus. She also wishes to keep using IA as JT's auditor. While she accepts that the audit fee is likely to increase once JT is listed, she has indicated to the engagement partner that she may consider changing auditors if the fee increased by more than 20 per cent.

Due to their longstanding business relationship, the partners of IA have become close friends of Claude, and they regularly play tennis and dine together. Claude often pays for these events. Given the line of her business, Claude also believes it is very important to 'keep up appearances', and is often seen driving around town in her Bentley Continental. She occasionally lets audit team members use this car for a weekend to thank them for their efforts.

You are a member of the audit team for this year's audit of JT's financial statements.During the audit Claude asks you what is meant "auditor independence".

REQUIRED

a) Briefly discuss the role and purpose of independence in the context of auditing.Additionally, describe a situation unrelated to either accounting or auditing in which independence could be or was an issue.

b) From the above narrative, identifyfour (4) distinct threatsto IA's independence. For each threat:

(i) identify which of the five categoriesof threat that it represents,

(ii) explain whyit constitutes a threat to independence, and

(iii) explain how an auditor could appropriately respondto the threat.