QUESTION 2 ( 12 marks)

The following situations refers to threats to the Auditors independence.You are asked to state what the different threats to the Auditors independence are and explain how these threats impact on the Auditors independence and any other implications for yourself and your firm.

SITUATION 1 Enid Blyton has been working as an auditor for the Anthony Don Chartered Accounting firm for the past four years and has just started an audit on the Green Thumbs environmental company, a small newly listed public company which has just listed as a public company one month ago.The Green Thumbs environmental company has just started using a new contractor to dispose of its toxic waste .You know that this new contractor has won tenders in the past and there have been several unfavourable articles about this contractor in the local press. Your Audit Manager ,Peter Don , has stated that it is your responsibility just to provide an opinion on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.

SITUATION 2 Jean Douglas has just started to do the audit on the latest financial statements and has just made the following notes from your opening interview with John Dooley,CEO of Dooleys. John has apologised for not making the final payment of 30% of the prior years audit fee but has explained that he will ensure the cheque is written once he is happy with the progress on the current audit. At this stage John Dooley has advised that the firm will be able to start deliberations about the selection of Auditor for the following year.The Dooleys audit comprises forty percent of the annual audit fees for the firm . John has advised that they will be providing a free trip to Europe for an Auditor from the Audit firm and his partner once the audit is successfully completed. Jean is concerned with several aspects of the current audit as Dooleys do not appear to be following the accounting standards in their valuation of inventory as they are not taking into account the reductions in fair value of inventory and the impact on the financial statements is material.