Assume that you are the Audit Manager of DNK Assurance PAC, a firm of Public Accountants and Chartered Accountants. Your current client, Crown Pte Ltd, a Shipping Company, has referred a new Client, Blue Star Pte Ltd, a company engaged in the business of Oil and Gas, for External Audit and other Non-Audit Services for the year ended 30 June 2021. During the initial discussion, it was revealed that Crown Pte Ltd is a major customer of Blue Star Pte Ltd.

In view of your decades of audit experience in the Oil and Gas Industry, you have been selected by the Audit Partner, to lead the audit engagement team for the new audit of Blue Star Pte Ltd and also to manage the audit of Crown Pte Ltd at the same time.

At the time of the initial meeting with the Board of Directors of Blue Star Pte Ltd, it has come to your knowledge that the Finance Director of Blue Star Pte Ltd studied Bachelor Degree of Accountancy with you at the University.

No profit was made by the new client, Blue Star Pte Ltd in the past 3 years. The directors explain that this is primarily due to increasing costs and overheads in the Oil and Gas Industry. They are confident they have now controlled their costs and overheads for the current financial year. They have been recently approached to submit tender for a huge profitable contract which would enhance their financial performance and profitability in the days to come.

They would like you to assist them with the preparation of the tender and present with them on the day. The current year’s financial statements and external audit of Blue Star Pte Ltd are being finalized with another audit firm. The Finance Director informs you that the current auditors have identified material misstatements, but the Board of Directors is not acceptable to make these adjustments. If adjusted, it would make the break-even position into a net loss.

The current auditors have replied to your professional clearance letter and mentioned that Blue Star Pte Ltd is still owing audit fees relating to the previous year. This is under dispute with the client. The potential fees from Blue Star Pte Ltd would amount to 13% of your firm’s total fee income.

Required:

a) Identify and explain SIX threats to independence if DNK Assurance PAC accepts the new client, Blue Star Pte Ltd, to audit the accounts for the year ended 30 June 2021.

b) For each threat that you have identified, recommend how the threat can be managed