HK LLP is a medium-sized Canadian-based accounting firm that provides accounting, audit, tax and advisory services to a broad range of clients across the country. It has 70 partners across its business streams and has enjoyed an increase in revenues over the last few years (last year's total revenue was $52 million).

Gordon, a partner at HK, has been reviewing the audit firm's current and prospective client portfolio. He wants to identify whether there are any independence threats in relation to the current and prospective clients that HK needs to respond to. He has asked you to review a portion of the current and prospective clients (see below).

Required:

For each of the six clients below address the following:

a) State and Describe the independence threats to HK, discuss only one threat for each case. Stating multiple threats for each case will result in zero marks.

b) Describe two safeguards or mitigation steps HK should take in relation to the threats identified for each case (2 Marks). Use the following format to answer your question.

State and Describe the Independence Threat

Describe two safeguard or mitigation steps

1. You are a prospective auditor of Accidents-do-happen Inc. Accidents is a high-profile company in the Canadian insurance industry. HK has been approached to take on the audit of this client in the current year along with areas of tax work. There are also possible opportunities for secondments for HK staff to Accidents' internal audit department. The overall fee discussed for the tax and audit work is around $2.3 million.
2. You are the current auditor of Apples-2-Go Ltd. Apples is looking to expand its customer base by offering online sales of its fresh fruit and vegetables. Apples has approached HK to advise the company in relation to the purchase and implementation of an appropriate website and sales system to allow customers to make web-based purchases of Apples' goods over the Internet. HK currently undertakes Apples' statutory annual audit.
3. You are the current auditor of Basic banking Inc. For the last seven years, Finn has been the engagement partner and Stanley the independent partner for the Basic audit. The systems audit partner for last year's audit has just resigned from HK, and Shona (HK partner) suggested that she could take on the role again after a year's absence from the job. She has excellent knowledge of the client because she was the systems audit partner on the engagement for the seven years prior to last year's audit. Last year, the work done for Basic by HK totalled $5.1 million. Basic has a full listing on the Toronto Stock Exchange.
4. You are the current auditor of Couture Curtains Ltd. Charlie, the owner and managing director of Couture, was so impressed by the speed with which Shona's audit team completed Couture's year-end audit last year that he has said that he will pay an additional $10,000 to HK if Shona's team can do it as quickly this year as they did last year.
5. You are a prospective auditor of Doncaster Doughnuts Ltd. Doncaster has just been bought by Seriously Sweet Tooth Inc., a company listed on the Toronto Stock Exchange. As such, Doncaster has approached HK for assistance to ensure that they are IFRS compliant. Peter, the managing director of Doncaster, has told Stanley (HK partner) that if he is impressed with HK's work then he may also offer Doncaster's annual audit to HK.
6. You are the current auditor of Eco-Penzil Ltd. Eco-Penzil is currently suffering some financial difficulties due to the failure in the marketplace of its latest range of eco-friendly pens. As such, it is three months behind in its payments to all suppliers (goods and services). Gretna, the audit partner on the engagement, is concerned about the going-concern status of the company.