Question
You are an audit manager at Happy Auditors and have been approached to be the lead auditor on the audit of Beyond Fried Chick'n Ltd
You are an audit manager at Happy Auditors and have been approached to be the lead auditor on the audit of Beyond Fried Chick'n Ltd (BFC), a manufacturer of frozen meat substitutes, for the year ended 30 June 2022. This is the first time that you are the lead auditor for this client, although BFC has been a client of Happy Auditors for over ten years. You are taking over as lead auditor from Millie Bailey, and the other two employees of Happy Auditors who also played a significant role in last year's audit have been transferred to another client. BFC is one of the biggest clients of Happy Auditors, although Happy Auditors is yet to receive the payment for last year's audit.
As part of BFC's financing arrangements with its bank, Eastpac Ltd, it has a loan covenant on a 5-year loan that stipulates that the quick ratio cannot be less than 1.3 or Eastpac Ltd has the right to demand repayment and withdraw all funding. The board has advised you that BFC's quick asset ratio is currently at marginally below this level due to industrial action holding up the sale of goods imported from overseas. The board has asked you to ignore this temporary breach of the loan covenant, explaining that BFC normally is a stable and financially sound company, and that the ratio will return to a positive level on resolution of the industrial dispute. The board has indicated that unnecessarily disclosing the loan covenant breach within the audit report would force it to reconsider its plans to use your audit firm for next year's audit.
Question Identify and explain two separate key threats to Happy Auditor's independence that may arise under APES 110
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