Jane, Partner in a firm of Chartered Accountants, is Engagement Partner on the audit of Springly Ltd., a beverages supply company. She is reviewing the audit file for the year ended June 30, 2020. At the front of the file is a memo from the Audit Manager recommending the issue of a qualified audit opinion. Springlys major customer, a chain of grocery stores, is known to be in financial difficulties yet no provision has been made against the material debt owed to Springly. Springlys Financial Director is arguing that their customer has sold the chain of grocery stores and they are just waiting for the new buyer to come up with the money. But once they have the money the customer will be in a position to repay all their debts. He claims to have consulted another firm of accountants who have indicated that a provision is being overly prudent.

Jane is unhappy with the situation for the following reasons:

1. She is reasonably certain that, if she issues a qualified opinion, the Directors of Springly will recommend appointment of another firm as Auditor and the Finance Director appears to be already opinion shopping.
2. Her firm supplies other non-audit services to Springly such as tax planning which bring in twice as much revenue as the audit and is more profitable. It is highly unlikely the firm would continue to be asked to provide these services if the audit is lost. In total, fees paid by Springly for the audit and tax planning services amount to 16% of the audit firms revenues.
3. She has been the Engagement Partner for ten years and is certain than the Finance Director has always been truthful with her in the past. However, the evidence in the audit file is quite persuasive that the customer is, currently, in financial difficulty and if the sale of the chain of grocery stores does not materialize they will be unable to pay their debts.

She calls the Finance Director to advise him that she will have no choice but to give a qualified opinion if the financial statements do not contain a provision against the debt.

Required:

1. Identify four threats to auditor independence in the given situation supported with a reason and propose an appropriate safeguard for each threat. (8 marks)
2. Describe actions that Auditors can take when being threatened with removal by the Directors. (5 marks)
3. Explain how obtaining a second opinion differs to opinion shopping. (3 marks)
4. What is meant by audit rotation and what are its supposed benefits and drawbacks? (4 marks)