A.You are the auditor partner for AAA audit firms, tendering for the audit of Howard Ltd for the 20X1 financial year. During the review of an Australian Securities and Investments Commission (ASIC) company extract for your client Howard Ltd, you note that AAA audit firm holds an interest in Howard Ltd. The interest is material to AAA audit firm.

Required:

1. What is the threat to compliance with the fundamental principles? (2 marks) 2. Explain whether any safeguards could be put in place to reduce the threat to an acceptable level. (2 marks

b. Lisa is a highly competent employee of the XYZ Ltd. She is responsible for accounting-related matters for more than 15 years. Her devotion to the firm and her duties had always been exceptional, and over the years, she has been given increased responsibility. Recently, the managing director of XYZ Ltd and the audit partner of an independent accounting firm in charge of the audit were shocked and dismayed to discover that Lisa had embezzled more than $1,000,000 over the fiveyear period by not recording billings in the sales journal and subsequently diverting cash receipts.

Required: Discuss the key internal control weaknesses that permitted the defalcation to occur in XYZ Ltd. (3 marks)