CASE $1-$ INDEPENDENCE THREATS AND SAFEGUARDS

MaxSecurity Limited $($MaxSecurity$)$ has been an audit client of Smith & Associates $($S&A$)$ for the past $15$ years. MaxSecurity is based in Wollongong, where it manufactures high$-$tech armour$-$plated personnel carriers. MaxSecurity often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialised and MaxSecurity only does business with nations that have a recognised, democratically elected government. MaxSecurity maintains a highly secure environment, given the sensitive and confidential nature of its vehicle designs and its clients.

Clarke Field has been the engagement partner on the MaxSecurity audit for the last five years. Clarke is a specialist in the defence industry and intends to remain as review partner when the audit is rotated next year to a new partner $($Sally Woodrow, who is to be promoted to partner to enable her to sign$-$off on the audit$).$

In September $2016,$ MaxSecurity installed an off$-$the$-$shelf costing system to support the highly sophisticated and cost sensitive nature of its product designs. The new system replaced a system that had

been developed in$-$house as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings$.$ The old system also had difficulty with the company$$s broader reporting requirements.

MaxSecurity$$s information technology $($IT$)$ department, together with the consultants from the software company, implemented the new manufacturing costing system. There were no customised modifications. Key operational staff and the internal audit team from MaxSecurity were significantly engaged in the selection, testing, training and implementation stages.

The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventories movements such as purchases, sales, wastage and damaged stock losses.

MaxSecurity has a small internal audit department which is headed by an ex$-$partner of S&A$,$ Rydell Creek. Rydell joined MaxSecurity after leaving S&A six years ago after completing his Chartered Accountants qualifications. Rydell is assisted by three junior internal auditors, all of whom are completing Bachelor of Business studies at Swanston University. MaxSecurity$$s end of financial year is $30$ June.

$1.$ Are there any threats to independence for S&A in its audit of MaxSecurity?

$2.$ Can you propose any recommendations to safeguard S&A against the potential independence threats you have identified? Explain.