Identify and explain six ethical threats to independence and fundamental ethical principles.

For each of the threats identified in question (a), propose a safeguard to alleviate the threats to acceptable level.

You are an audit partner at Smith, Jones and Associates, a small Chartered Accountancy firm. You were appointed as an auditor to a local company named Toyplanet Ltd. The previous auditor, Ace & CAs had resigned due to having so few audit clients that it was no longer commercially viable for the firm to retain its registered auditor status. This provided the opportunity for your firm to take on the client. You and your fellow partners were delighted to be gaining an audit client within the highly competitive audit service market. You were well aware that the firm may make some staff redundant if more work was not picked up quickly.

Toyplanet Ltd was established in Auckland seven years ago and is owned by 60 shareholders who each hold 10 shares. The company buys toys from suppliers in China and sells them in three stores located in shopping malls in Manukau, Henderson and Albany respectively. Toyplanet Ltd has financial year ended on 31 March. You met Ken Alberton, Toyplanet Ltd's Managing Director (MD), at various local events and had a good personal relationship with him. Ken was someone with a very good reputation in the local business community and was involved in a lot of charitable fundraising activities. For this audit engagement, Ken offered you a fixed fee plus 2.5% of audited revenue as audit fee.

Ken introduced you to Dwayne Carefree, the Financial Controller of Toytown Ltd. You recognised Dwayne who completed a tertiary accounting qualification with you at a local university. Both you and Dwayne got employed by a local accounting firm XYZ CAs after graduation. You were employed in audit service while Dwayne was in Corporate Advisory Services. Both of you worked in XYZ for four years to complete professional exams and became Chartered Accountants. Soon after, Dwayne resigned for he had a good job offer from another accounting firm. You have not seen Dwayne after he left XYZ CAs. He joined Toyplanet Ltd seven years ago as the financial controller.

You believed that this was a good client to win and, with Ken's considerable business connections this might not be the only audit client that you would pick up in the coming months. Further, Dwayne is a qualified professional accountant, and this would probably make the audit process less stressful. In a meeting with Ken and Dwayne, you learnt that a competitor Kids Toys Ltd has recently entered the New Zealand market which has caused Toyplanet Ltd to miss the sales target and reduced profits. Ken also said that he was concerned about an investor, Little Toys Ltd who showed interests in buying a significant number of shares in the company. The Board of Directors of Toyplanet issued 50 new shares to Little Toys Ltd on 1st November 2021. You noted that Little Toys Ltd is an existing client of Smith, Jones and Associates and audit partner was Andrew Choi.

During the negotiation, Little Toys Ltd, added the following terms to the contract: "Should the company fails to meet 90 per cent of its revenue projection as at 31 March 2022 following the investment, the investor will have the right to buy out the shares of other shareholders at 50 per cent of their original purchase prices. The investor agrees to retain all senior executives and the Financial Controller in the company for at least three years. The audited financial statements will be used as a main source for the investor to assess Toyplanet's performance."

The audit fieldwork has been done within budget and the files appear to show that, as Ken had earlier advised that the company have maintained a good set of records and produced appropriate documentation to support the figures in the draft financial statements. The sales seemed to have picked up and Toyplanet Ltd's sales target has been achieved. You also noticed a note written by an audit junior Kirsty Sheriff as following:

Employee 'Pay As You Earn' (PAYE) income tax deductions are paid to Inland Revenue Department (IRD) in accordance with usual lodgement requirements on the required business day of each subsequent month. Checked three months PAYE payments to IRD and found that part of the January remittance was slightly late, so I discussed the matter with Dwayne and he explained that this was a direct debit error by the bank. Furthermore, the remittance due in March was paid late. I discussed the delay with the Payroll Clerk and she advised that Dwayne instructed her to do so. Dwayne advised me that the late payment was due to a change of accounting systems. I examined the PAYE Tax file. The IRD noted the delay but it had decided not impose a fine because it was the first time the Company's remittance had been late. Considered a minor issue. No financial effect, and not material. No further action required. Kirsty Sheriff.

You were about to sign off on Kirsty's findings but was worried that there were some errors that you may not be aware of. You obtained an audit trail of the clearing account for the PAYE tax for March. You immediately noticed that the reason that the payment to the IRD was late because the Clearing Account did not have a sufficient balance to pay the full amount on time. As you were curious about two transactions in the company's general ledger called Miscellaneous Suspense account totalled $ 45,320.25, you arranged to obtain two copies of paid cheques from the bank. The cheque was made out to MercyAscot Hospital. You presented the information to Dwayne who immediately confided that he needed the money to pay his son's medical bills. Dwayne had used the PAYE Tax Clearing account and the Miscellaneous Suspense account in an effort to mask the transaction. He requested that you would not disclose the issue to Ken because the company suffered no loss or financial penalty, and the amount was below the audit materiality level, therein you did not have to worry about it. Dwayne promised to repay the company in the next three months.

Toyplanet was keen to see the auditor's report to be signed off within three working days, one week earlier than had originally been envisaged. While you were reviewing the working papers, Ken called you saying that two of his friends are looking for a 'realistic' auditor and he wanted to introduce you to them. This was great news to you and your firm. You have decided to sign off the auditor's report without raising any concerns.