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Question THREE Your firm has been invited by Mr Allard, the managing director of Healey Ltd, to accept appointment as auditor of the company. Mr Ailard owns 51 % of the shares of the company and the remaining 49% is owned by IYr Morgan, the sales director. The present firm of auditors will not be re-appointed when its term of office expires as Mr Allard is dissatisfied with the cost of its services. In addition, Mr Allard has requested that your firm takes on the following work. (1) Advise both parties on the purchase consideration in respect of the sale of Mr Morgan's shares in Healey Ltd; Mr Morgan plans to retire and has agreed in principle to sell his shares to Mr Allard. (2) Advise on an on-going basis in respect of Mr Allard's plans to expand Healey Ltd's operations by the acquisition of other businesses; this will involve investigations and reports on businesses identified by Mr Allard. Requirements (a) (i) State the matters, other than independence, that you would consider and the procedures you would perform in deciding on the suitability of Healey Ltd as an audit client for your firm. (8 marks) (ii) Explain the six general threats to independence identified by ethical standards. (6 marks) (iii) State, with reasons, the specific threats to the auditor's objectivity which may arise providing the additional services outlined above and describe the safeguards which may offset such threats. (7 marks) (b) Outline the potential liability of the firm in respect of the three services requested by Mr Allard, including suggestions related to how the firm might restrict its liability in respect of the services provided. (15 marks) (c) Identify four quality control policies or procedures the firm could implement to ensure that the independence and quality of the audit was not impaired. (4 marks) [Total: 40 Marks] Question THREE Your firm has been invited by Mr Allard, the managing director of Healey Ltd, to accept appointment as auditor of the company. Mr Ailard owns 51 % of the shares of the company and the remaining 49% is owned by IYr Morgan, the sales director. The present firm of auditors will not be re-appointed when its term of office expires as Mr Allard is dissatisfied with the cost of its services. In addition, Mr Allard has requested that your firm takes on the following work. (1) Advise both parties on the purchase consideration in respect of the sale of Mr Morgan's shares in Healey Ltd; Mr Morgan plans to retire and has agreed in principle to sell his shares to Mr Allard. (2) Advise on an on-going basis in respect of Mr Allard's plans to expand Healey Ltd's operations by the acquisition of other businesses; this will involve investigations and reports on businesses identified by Mr Allard. Requirements (a) (i) State the matters, other than independence, that you would consider and the procedures you would perform in deciding on the suitability of Healey Ltd as an audit client for your firm. (8 marks) (ii) Explain the six general threats to independence identified by ethical standards. (6 marks) (iii) State, with reasons, the specific threats to the auditor's objectivity which may arise providing the additional services outlined above and describe the safeguards which may offset such threats. (7 marks) (b) Outline the potential liability of the firm in respect of the three services requested by Mr Allard, including suggestions related to how the firm might restrict its liability in respect of the services provided. (15 marks) (c) Identify four quality control policies or procedures the firm could implement to ensure that the independence and quality of the audit was not impaired. (4 marks) [Total: 40 Marks]