Consider the following independent situations: 1.You have established an audit practice with two separate divisions: account preparation
Question:
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Consider the following independent situations:
1.You have established an audit practice with two separate divisions: account preparation and audit. Each division has a different partner and staff team. Your firm commonly prepares financial accounts and conducts audits. Your firm has recently been provided with a trial balance from a listed client Red Ribbon Ltd, for whom your firm is preparing the financial accounts and conducting the audit. The client has significant expertise and approves all adjusting journal entries.
2.Daniel Jackson is part of the audit team for the current audit of Jupiter Ltd. After 2 weeks at the client, he has advised you that he has been offered a job at Jupiter Ltd as soon as the current audit is finished.
3.One of your major clients, Fruity Juices Ltd, has talked to you about a consulting engagement next year for you to do a complete review of the adequacy of the entitys quality controls over the production of its fruit juices. However, the managing director has indicated that some of the
Board are concerned about you taking up too much of their staffs time asking unnecessary questions. Therefore, he has suggested that your chances of getting the engagement will be significantly improved if you keep your questions of staff to a minimum during the current audit.
4.You have audited Apex Ltd, a stable engineering firm, for several years. At the start of this year, the finance director, Carol Ling, retired after 10 years with company and was replaced by Eric Lay, a long-time friend of the audit manager Bruce Li, who was best man at Erics recent marriage.
5.One of your audit clients, Super Trooper Ltd (STL) is a large superannuation fund. The Australian Taxation Office has advised STL that it has rejected its taxation treatment of a material amount of income from investments and that it disagrees with the taxation advice STL
gave to its members. The matter has been referred to the Superannuation Complaints Tribunal and STL has requested that you represent them at the Superannuation Complaints Tribunal.
REQUIRED:
For each of the independent situations above:
(a)Identify the type of potential threat to independence. Justify your answer.
(b)Explain what safeguards, if any, that could be implemented to reduce the independence threats.
(c)Assess whether audit independence can be achieved .
Part B
Background
WMD is the wealth management division of Eastpac Bank (Eastpac) and provides investment, superannuation, insurance and private wealth solutions to corporate and institutional customers. The following is a list of the auditors planning file notes in relation to fraud detection for the audit of the WMD unit.
1.Ensure all material fraud instances are detected.
2.The auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.
3.Respond appropriately to fraud or suspected fraud identified during the audit.
4.A discussion among all of the audit firms staff on how and where the entitys financial statements may be susceptible to material misstatements due to fraud, including how fraud might occur.
5.Make enquiries of management, and others within the entity as appropriate, to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.
6.Obtain sufficient appropriate audit evidence to confirm all potential fraud instances have been uncovered and their impacts considered.
7.Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial statements.
8.Determine whether management has sufficient skills to prevent and detect fraud (e.g. through proof of attendance at appropriate industry seminars and workshops, or past experience with fraud).
9.Obtain a copy of the clients code of ethics document, and ensure employees have access to it.
10.Evaluate whether the accounting policies selected by the entity may be indicative of fraud.
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