MINI AUDIT - COOK'S FURNITURE LTD.

BACKGROUND INFORMATION

BDC, Chartered Accountants is a medium size accounting firm located in Auckland with four audit partners, eight business advisory partners and four tax partners. It also has affiliations with other network firms in other countries. The firm has been approached to audit Cook's Furniture Ltd. The firm adopts procedures for acceptance and continuance of clients following ISA (NZ) 220 and PES 1. To determine whether BDC should accept a new client, an audit partner needs to interview the prospective client to determine what services the client needs and the ability of the firm to provide those services. As the prospective audit manager on the engagement, you accompanied the audit partner Charles Kirby on the interview. The following is a summary of your notes from the interviews with senior management of Cook's Furniture.

NOTES FROM CLIENT INTERVIEW

Cook's Furniture Ltd is New Zealand company incorporated in 1985 by Colin Cook who is an experienced carpenter. The company is a manufacturer of furniture and cabinetry for commercial use. The products include desks, chairs, sofas, filing cabinets, bookcases, credenzas and European style cabinets. The company's manufacturing plant and executive offices are located in a building leased from Colin Cook (the founder of the company), which adjacent to delivery and warehouse facilities. Two adjacent buildings house the corporation which located in Manukau Auckland. The company purchases raw materials including coil steel, metal bar stock, hardware, laminated particleboard, timber board, casters, fabric, rubber and plastic products, paint and shipping cartons. Raw materials are delivered to the warehouse by common carriers or by supplier's trucks. Some the raw materials are sourced within New Zealand, others are imported from multiple countries. The company sells both domestically and to Australia. Finished products are shipped FOB from the warehouse or picked up by the customer. Cook's Furniture has five delivery trucks for local orders.

Cook's Furniture commits to sustainable practice relating to the use, storage, and transportation. Where possible, they use durable and recycled materials. The company meets the ISO 14001 standards for its manufacturing process, logistics and transport facilities. ISO 14001 is an Environmental Management System that aids companies in minimising adverse impacts on the environment, increasing efficient resource use and complying with environmental legislation and regulations.

Cook's Furniture is family owned and not publicly traded; 1,000,000 shares were issued. Major stockholders include the founder, who recently retired as the Chairman of the Board, Colin Cook. He holds 30% of the outstanding shares. Colin is 73 years old, and until his retirement, was closely involved in all major decisions affecting the company. He is very proud of the strong reputation his company has for being ethical and for meeting its commitments and promises. His son, Carl Cook, has worked in the business for the last 20 years, is the current CEO and Chairman of the board, and under his father's guidance during the last 5 years, has assumed the responsibility of overseeing the business's day-to-day operations. Carl is also a 30% owner. Other family members own an additional 30% of the business. The Chief Operating Officer (COO) and Chief Financial Officer (CFO) are the only non-family owners at 5% each.

Cook's senior management is comprised of Carl Cook, the CEO and Chairman of the Board; Steven Chen, the COO; and Claire Tuner, the CFO. Chen joined the company two years ago after working for 11 years in the industry for a major office furniture manufacturer. Turner has worked for the company for about 18 months. She was a senior audit manager of BDC prior to joining Cook's Furniture.

a) Identify four situations that may impose ethical threats to the auditors and the audit firm.

b) For each situation, explain potential threats to professional ethical requirements.

c) Discuss possible safeguards to address each threat

(refer to the relevant PES standards in your answer).

LINK TO PES STANDARD: https://drive.google.com/file/d/17Tz7Y0bscIcSR3FogESJlOQcdY0ER360/view?usp=sharing