Background

You are the audit manager of RFC, an accounting firm with offices located throughout regional NSW and Victoria, including towns such as Bendigo, Albury, Wagga, Bathurst and Tamworth. RFC is a middle tier firm which provides audit and accounting services across a range of industries. During May 2020 you met with the audit senior of RFC, Wayne Campbell to discuss several findings related to some of RFCs clients.

Pump Ltd

Lastly, Wayne tells you that RFC have recently been approached to conduct the audit of Pump Ltd, a company which creates mobile phone apps and games, for the year ended 30 June 2020.

RFC has not previously audited Pumps financial report, although it has undertaken other types of engagements for Pump. Last year Pump hired RFC to assist in the redesign of Pumps accounting software to ensure that internal controls over online sales and transactions were adequate to ensure the confidentiality of customer data and accuracy of recording transactions. The new software was implemented at the beginning of the current year and appears to be working satisfactorily. As part of this years audit, you expect to review the internal controls at Pump, including the controls within the IT systems.

As part of Pumps financing arrangements with its bank, Honest Ltd, it has a loan covenant that stipulates that the quick asset ratio cannot be less than 1:1 or Honest Ltd has the right to withdraw all funding. Wayne says that the board has advised him that Pumps quick asset ratio is currently at 0.9:1 due to legal action over intellectual property rights which are holding up the sale of various apps and games. The board has asked Wayne to ignore this temporary breach of the loan covenant, explaining that Pump is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the legal dispute, which it believes with certainty that it will win. The board has indicated that unnecessarily disclosing this within the audit report would force it to reconsider its plans to use your audit firm for other engagements.

Lastly, Wayne says that as a result of Pumps current cash flow difficulties, the board has requested that RFCs audit fee for 2021 be paid in Pump shares. The board has indicated that the market value of the shares will equate to the value of the audit fee charged by RFC.

Question 3 (3 marks)

In relation to Pump.

• Identify and explain three separate key threats to RFCs independence that may arise under APES 110.
• For each independence threat identified above, describe the course of action RFC needs to take to ensure compliance with APES 110.