AUDITING.

State and explain the threats of each and state the safeguard for each threat in a table.

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sample answer :

in a table form, heading as "threats" and "safeguards" for each scenario.

Write answers to each of the five (5) situations described below in a tabulated format if helpful having "Threats" and "Safeguards" column headings. The following situations involve Alvin Hii, an audit partner with the accounting firm of Kelvin & Sic Co. He is involved with the audit of Momoland Shipping Sdn Bhd (Momoland). 1. Alvin Hi's wife, Sarah Lau, is planning to take a loan from Momoland which is material to Alvin Hii, Sarah Lau, and Momoland. 2. The audit partner Alvin Hii 's first cousin, Sophie Tang, recently purchased considerable shares of significant value in Momoland, which is material to Sophie, on the advice of her financial planner. 3. The assistant accountant of Momoland resigned 6 months ago and has not been replaced. As a result, Momoland's transactions have not been recorded and the accounting records are not up to date. To comply with the terms of the loan agreement, Momoland needs to prepare interim financial statements but cannot do so until the records are up to date. The managing director of Momoland wants Alvin to help them out because he performed the audit last year. Alvin agrees to help out Momoland for 1 month before the start of the annual audit on which he will be involved again 4. Alvin Hii recently purchased a large number of shares in Cal El Sdn Bhd, a mining firm. The director of Momoland, Desmond Ling, is also known to have a large investment in Cal El Sdn Bhd. 5. To express sincerity towards the accounting firm Kelvin & Sic Co. and the audit partner Alvin, and to maintain a good working relationship in anticipation of another smooth audit, Momoland would like to present a complimentary 3-week holiday package voucher for Alvin and his family to Hawaii . All expenses, including accommodation, food, drink and travelling costs, will be paid by Momoland. Required For each of the independent situations above, and using the conceptual framework in APES 110 (Code of Ethics for Professional Accountants), answer the following questions: 1. Identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified. (Total 40 Marks) Financial Interests 290.102 Holding a Financial Interest in an Audit Client may create a self-interest threat. The existence and significance of any threat created depends on: (a) the role of the person holding the Financial Interest , (b) whether the Financial Interest is direct or indirect, and (c) the materiality of the Financial Interest 290.103 Financial Interests may be held through an intermediary (e.g. a collective investment vehicle, estate or trust). The determination of whether such Financial Interests are director indirect will depend upon whether the beneficial owner has control over the investment vehicle or the ability to influence its investment decisions. When control over the investment vehicle or the ability to influence investment decisions exists, this Code defines that Financial Interest to be a Direct Financial Interest. Conversely, when the beneficial owner of the Financial Interest has no control over the investment vehicle or ability to influence its investment decisions, this Code defines that Financial Interest to be an Indirect Financial Interest. 290.104 If a member of the Audit Team, a member of that individual's Immediate Family, or a Fim has a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Therefore, none of the following shall have a Direct Financial Interest or a material Indirect Financial Interest in the client: a member of the Audit Team; a member of that individual's Immediate Family, or the Fimm. 290.105 When a member of the Audit Team has a Close Family member who the Audit Team member knows has a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client, a self-interest threat is created. The significance of the threat will depend on factors such as: The nature of the relationship between the member of the Audit Team and the Close Family member, and The materiality of the Financial Interest to the Close Family member. The significance of the threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an Acceptable Level. Examples of such safeguards include: The Close Family member disposing, as soon as practicable, of all of the Financial Interest or disposing of a sufficient portion of an Indirect Financial Interest so that the remaining interest is no longer material; Having a Member review the work of the member of the Audit Team; or Removing the individual from the Audit Team. 290.106 If a member of the Audit Team, a member of that individual's Immediate Family, or a Fim has a direct or material Indirect Financial Interest in an entity that has a controlling interest in the Audit Client, and the client is material to the entity, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Therefore, none of the following shall have such a Financial Interest: a member of the Audit Team; a member of that individual's Immediate Family, and the Firm. 290.107 The holding by a Firm's retirement benefit plan of a direct or material Indirect Financial Interest in an Audit Client creates a self-interest threat. The significance of the threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an Acceptable Level3. 290.108 If other partners in the Office in which the Engagement Partner practices in connection with the Audit Engagement, or their Immediate Family members, hold a Direct Financial Interest or a material Indirect Financial Interest in that Audit Client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Therefore, neither such partners nor their immediate Family members shall hold any such Financial Interests in such an Audit Client 290.109 The Office in which the Engagement Partner practices in connection with the Audit Engagement is not necessarily the Office to which that partner is assigned. Accordingly, when the Engagement Partner is located in a different Office from that of the other members of the Audit Team, professional judgment shall be used to determine in which Office the partner practices in connection with that engagement. 290.110 If other partners and managerial employees who provide non-audit services to the Audit Client, except those whose involvement is minimal, or their Immediate Family members, hold a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level. Accordingly, neither such personnel nor their Immediate Family members shall hold any such Financial Interests in such an Audit Client 290.111 Despite paragraphs 290.108 and 290.110, the holding of a Financial Interest in an Audit Client by an immediate Family member of (a) a partner located in the Office in which the Engagement Partner practices in connection with the Audit Engagement, or (b) a partner or managerial employee who provides non-audit services to the Audit Client, is deemed not to compromise Independence if the Financial Interest is received as a result of the Immediate Family member's employment rights (e.g., through pension or share option plans) and, when necessary safeguards are applied to eliminate any threat to Independence or reduce it to an Acceptable Level. However, when the Immediate Family member has or obtains the right to dispose of the Financial Interest or, in the case of a stock option, the right to exercise the option, the Financial Interest shall be disposed of or forfeited as soon as practicable. 290.112 A self-interest threat may be created if the Firm or a member of the Audit Team, or a member of that individual's Immediate Family, has a Financial Interest in an entity and an Audit Client also has a Financial Interest in that entity. However, Independence is deemed not to be compromised if these interests are immaterial and the Audit Client cannot exercise significant influence over the entity. If such interest is material to any party, and the Audit Client can exercise significant influence over the other entity, no safeguards could reduce the threat to an Acceptable Level. Accordingly, the Fim shall not have such an interest and any individual with such an interest shall, before becoming a member of the Audit Team, either: (a) Dispose of the interest; or (b) Dispose of a sufficient amount of the interest so that the remaining interest is no longer material. 290.113 A self-interest, familiarity or intimidation threat may be created if a member of the Audit Team, or a member of that individual's Immediate Family, or the Firm, has a Financial Interest in an entity when a Director, Officer or controlling owner of the Audit Client is also known to have a Financial Interest in that entity. The existence and significance of any threat will depend upon factors such as: The role of the professional on the Audit Team: Whether ownership of the entity is closely or widely held: Whether the interest gives the investor the ability to control or significantly influence the entity, and The materiality of the Financial Interest. The significance of any threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an Acceptable Level. Examples of such safeguards include: Removing the member of the Audit Team with the Financial Interest from the Audit Team; or Having a Member review the work of the member of the Audit Team. 290.114 The holding by a Firm, or a member of the Audit Team, or a member of that individual's Immediate Family, of a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client as a trustee creates a self-interest threat. Similarly, a self-interest threat is created when (a) a partner in the Office in which the lead Engagement Partner practices in connection with the audit, (b) other partners and managerial employees who provide non-assurance services to the Audit Client, except those whose involvement is minimal, or (c) their Immediate Family members, hold a Direct Financial Interest or a material Indirect Financial Interest in the Audit Client as trustee. Such an interest shall not be held unless: (a) Neither the trustee, nor an immediate Family member of the trustee, nor the Firm are beneficiaries of the trust; (b) The interest in the Audit Client held by the trust is not material to the trust; (c) The trust is not able to exercise significant influence over the Audit Client; and (d) The trustee, an immediate Family member of the trustee, or the Firm cannot significantly influence any investment decision involving a Financial Interest in the Audit Client. 290.115 Members of the Audit Team shall determine whether a self-interest threat is created by any known Financial Interests in the Audit Client held by other individuals including: Partners and professional employees of the Firm, other than those referred to above, or their Immediate Family members; and Individuals with a close personal relationship with a member of the Audit Team. Whether these interests create a self-interest threat will depend on factors such as: The Firm's organisational, operating and reporting structure, and The nature of the relationship between the individual and the member of the Audit Team. The significance of any threat shall be evaluated and safeguards applied when necessary to eliminate the threat or reduce it to an Acceptable Level. Examples of such safeguards include: Removing the member of the Audit Team with the personal relationship from the Audit Team: Excluding the member of the Audit Team from any significant decision-making concerning the Audit Engagement; or Having a Member review the work of the member of the Audit Team. 290.116 If a Firm or a partner or employee of the Firm, or a member of that individual's Immediate Family, receives a Direct Financial Interest or a material Indirect Financial Interest in an Audit Client, for example, by way of an inheritance, gift or as a result of a merger and such interest would not be permitted to be held under this section, then: (a) If the interest is received by the Firm, the Financial Interest shall be disposed of immediately, or a sufficient amount of an Indirect Financial Interest shall be disposed of so that the remaining interest is no longer material (b) If the interest is received by a member of the Audit Team, or a member of that individual's Immediate Family, the individual who received the Financial Interest shall immediately dispose of the Financial Interest, or dispose of a sufficient amount of an Indirect Financial Interest so that the remaining interest is no longer material; or (c) If the interest is received by an individual who is not a member of the Audit Team, or by an Immediate Family member of the individual, the Financial Interest shall be disposed of as soon as possible, or a sufficient amount of an Indirect Financial Interest shall be disposed of so that the remaining interest is no longer material. Pending the disposal of the Financial Interest, a determination shall be made as to whether any safeguards are necessary. 290.117 When an inadvertent violation of this section as it relates to a Financial Interest in an Audit Client occurs, it is deemed not to compromise Independence if: (a) The Firm has established policies and procedures that require prompt notification to the Fim of any breaches resulting from the purchase, inheritance or other acquisition of a Financial Interest in the Audit Client: (b) The actions in paragraph 290.116 (a)(c) are taken as applicable, and (c) The Fim applies other safeguards when necessary to reduce any remaining threat to an Acceptable Level. Examples of such safeguards include: Having a Member review the work of the member of the Audit Team; or Excluding the individual from any significant decision-making concerning the Audit Engagement. The Fim shall determine whether to discuss the matter with Those Charged with Governance. Loans and Guarantees 290.118 A loan, or a guarantee of a loan, to a member of the Audit Team, or a member of that individual's Immediate Family, or the Firm from an Audit Client that is a bank or a similar institution may create a threat to Independence. If the loan or guarantee is not made under normal lending procedures, terms and conditions, a self-interest threat would be created that would be so significant that no safeguards could reduce the threat to an Acceptable Level. Accordingly, neither a member of the Audit Team, a member of that individual's Immediate Family, nor a Fim, or Network Firm, shall accept such a loan or guarantee. 290.119 If a loan to a Firm from an Audit Client that is a bank or similar institution is made under normal lending procedures, terms and conditions and it is material to the Audit Client or Fim receiving the loan, it may be possible to apply safeguards to reduce the self-interest threat to an Acceptable Level. An example of such a safeguard is having the work reviewed by a Member from a Network Firm that is neither involved with the audit nor received the loan. 290.120 A loan, or a guarantee of a loan, from an Audit Client that is a bank or a similar institution to a member of the Audit Team, or a member of that individual's Immediate Family, does not create a threat to Independence if the loan or guarantee is made under normal lending procedures, terms and conditions. Examples of such loans include home mortgages, bank overdrafts, car loans and credit card balances. 290.121 If the Fim or a member of the Audit Team, or a member of that individual's Immediate Family, accepts a loan from, or has a borrowing guaranteed by, an Audit Client that is not a bank or similar institution, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level, unless the loan or guarantee is immaterial to both (a) the Firm or the member of the Audit Team and the Immediate Family member, and (b) the client. 290.122 Similarly, if the Firm or a member of the Audit Team, or a member of that individual's Immediate Family, makes or guarantees a loan to an Audit Client, the self-interest threat created would be so significant that no safeguards could reduce the threat to an Acceptable Level, unless the loan or guarantee is immaterial to both (a) the Fim or the member of the Audit Team and the Immediate Family member, and (b) the cliente. 290.123 If a Fim or a member of the Audit Team, or a member of that individual's Immediate Family, has deposits or a brokerage account with an Audit Client that is a bank, broker or similar institution, a threat to Independence is not created if the deposit or account is held under normal commercial terms Provision of Non-assurance Services to Audit Clients 290.156 Fims have traditionally provided to their Audit Clients a range of non-assurance services that are consistent with their skills and expertise. Providing non-assurance services may, however, create threats to the Independence of the Firm or members of the Audit Team. The threats created are most often self-review, self-interest and advocacy threats. 290.157 New developments in business, the evolution of financial markets and changes in information technology make it impossible to draw up an all-inclusive list of non-assurance services that might be provided to an Audit Client. When specific guidance on a particular non- assurance service is not included in this section, the conceptual framework shall be applied when evaluating the particular circumstances. 290.158 Before the Fim accepts an engagement to provide a non-assurance service to an Audit Client, a determination shall be made as to whether providing such a service would create a threat to Independence. In evaluating the significance of any threat created by a particular non- assurance service, consideration shall be given to any threat that the Audit Team has reason to believe is created by providing other related non-assurance services. If a threat is created that cannot be reduced to an Acceptable Level by the application of safeguards, the non-assurance service shall not be provided. 290.159 Providing certain non-assurance services to an Audit Client may create a threat to Independence so significant that no safeguards could reduce the threat to an Acceptable Level. However, the inadvertent provision of such a service to a Related Entity, division or in respect of a discrete Financial Statement item of such a client will be deemed not to compromise Independence if any threats have been reduced to an Acceptable Level by arrangements for that Related Entity, division or discrete Financial Statement item to be audited by another Firm or when another Firm re-performs the non-assurance service to the extent necessary to enable it to take responsibility for that service. 290.160 A Firm may provide non-assurance services that would otherwise be restricted under this section to the following related entities of the Audit Client: (a) An entity, which is not an Audit Client, that has direct or indirect control over the Audit Client; (b) An entity, which is not an Audit Client, with a Direct Financial Interest in the client if that entity has significant influence over the client and the interest in the client is material to such entity, or (c) An entity, which is not an Audit Client, that is under common control with the Audit Client. If it is reasonable to conclude that (a) the services do not create a self-review threat because the results of the services will not be subject to audit procedures and (b) any threats that are created by the provision of such services are eliminated or reduced to an Acceptable Level by the application of safeguards 290.161 A non-assurance service provided to an Audit Client does not compromise the Fim's Independence when the client becomes a Public Interest Entity it. (a) The previous non-assurance service complies with the provisions of this section that relate to Audit Clients that are not public interest entities; (b) Services that are not permitted under this section for Audit Clients that are public interest entities are terminated before or as soon as practicable after the client becomes a Public Interest Entity, and (c) The Fim applies safeguards when necessary to eliminate or reduce to an Acceptable Level any threats to Independence arising from the service. Management Responsibilities 290.162 Management of an entity performs many activities in managing the entity in the best interests of stakeholders of the entity. It is not possible to specify every activity that is a management responsibility. However, management responsibilities involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment and control of human, financial, physical and intangible resources. 290.163 Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would generally be considered a management responsibility include: Setting policies and strategic direction: Directing and taking responsibility for the actions of the entity's employees: Authorising transactions; Deciding which recommendations of the Firm or other third parties to implement: Taking responsibility for the preparation and fair presentation of the Financial Statements in accordance with the applicable financial reporting framework; and Taking responsibility for designing, implementing and maintaining internal control. 290.164 Activities that are routine and administrative, or involve matters that are insignificant, generally are deemed not to be a management responsibility. For example, executing an insignificant transaction that has been authorised by management or monitoring the dates for filing statutory retums and advising an Audit Client of those dates is deemed not to be a management responsibility. Further, providing advice and recommendations to assist management in discharging its responsibilities is not assuming a management responsibility. 290.165 If a Fimm were to assume a management responsibility for an Audit Client, the threats created would be so significant that no safeguards could reduce the threats to an Acceptable Level. For example, deciding which recommendations of the Firm to implement will create self- review and self-interest threats. Further, assuming a management responsibility creates a familiarity threat because the Firm becomes too closely aligned with the views and interests of management. Therefore, the Firm shall not assume a management responsibility for an Audit Client. 290.166 To avoid the risk of assuming a management responsibility when providing non- assurance services to an Audit Client, the Firm shall be satisfied that a member of management is responsible for making the significant judgments and decisions that are the proper responsibility of management, evaluating the results of the service and accepting responsibility for the actions to be taken arising from the results of the service. This reduces the risk of the Firm inadvertently making any significant judgments or decisions on behalf of management. The risk is further reduced when the Fim gives the client the opportunity to make judgments and decisions based on an objective and transparent analysis and presentation of the issues. Preparing Accounting Records and Financial Statements General Provisions 290.167 Management is responsible for the preparation and fair presentation of the Financial Statements in accordance with the applicable financial reporting framework. These responsibilities include: Originating or changing journal entries, or determining the account classifications of transactions; and Preparing or changing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and customer orders). 290.168 Providing an Audit Client with accounting and bookkeeping services, such as preparing accounting records or Financial Statements, creates a self-review threat when the Firm subsequently audits the Financial Statements. 290.169 The audit process, however, necessitates dialogue between the Firm and management of the Audit Client, which may involve (a) the application of accounting standards or policies and Financial Statement disclosure requirements, (b) the appropriateness of financial and accounting control and the methods used in determining the stated amounts of assets and liabilities, or (c) proposing adjusting journal entries. These activities are considered to be a normal part of the audit process and do not, generally, create threats to Independence. 290.170 Similarly, the client may request technical assistance from the Firm on matters such as resolving account reconciliation problems or analysing and accumulating information for regulatory reporting. In addition, the client may request technical advice on accounting issues such as the conversion of existing Financial Statements from one financial reporting framework to another (for example, to comply with group accounting policies or to transition to a different financial reporting framework such as International Financial Reporting Standards). Such services do not, generally, create threats to Independence provided the Firm does not assume a management responsibility for the client. Audit Clients that are Public Interest Entities 290.172 A Fimm shall not provide to an Audit Client that is a Public Interest Entity accounting and bookkeeping services, including payroll services, or prepare Financial Statements on which the Fim will express an Opinion or financial information which forms the basis of the Financial Statements. 290.173 Despite paragraph 290.172, a Fim may provide accounting and bookkeeping services, including payroll services and the preparation of Financial Statements or other financial information, of a routine or mechanical nature for divisions or Related Entities of an Audit Client that is a Public Interest Entity if the personnel providing the services are not members of the Audit Team and (a) The divisions or Related Entities for which the service is provided are collectively immaterial to the Financial Statements on which the Firm will express an Opinion; or (b) The services relate to matters that are collectively immaterial to the Financial Statements of the division or Related Entity. Gifts and Hospitality 290.230 Accepting gifts or hospitality from an Audit Client may create self-interest and familiarity threats. If a Firm or a member of the Audit Team accepts gifts or hospitality, unless the value is trivial and inconsequential, the threats created would be so significant that no safeguards could reduce the threats to an Acceptable Level. Consequently, a Fim or a member of the Audit Team shall not accept such gifts or hospitality independence memes APES 110 Code of Emisforsional Acu are being mel. His review has revealed the following al Shalby Hotels Sond chain of ACA SHS will comprised wound 17% of Tech GreatSaver's Sonha (Tohas not paid any of the medio ve years to ACActing cash flow problems. 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