You are an audit manager in Royal Accountants, a large audit firm which specialises in the audit of retailers. The firm currently audits Aladdin Pty Ltd, an online games producer, but Aladdin Pty Ltd's main competitor, Jafar Pty Ltd, has approached the audit firm to act as auditors. Both companies are highly competitive and Aladdin Pty Ltd is concerned that if Royal Accountants audits both companies then confidential information could pass across to Jafar Pty Ltd.

The audit engagement partner for Aladdin Pty Ltd has been in place for approximately six years and her son has just accepted a job offer from Aladdin Pty Ltd as a sales manager; this role would entitle him to shares in Aladdin Pty Ltd as part of his remuneration package. If Royal Accountants is appointed as internal as well as external auditors, then Aladdin Pty Ltd has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of Royal Accountants and Aladdin Pty Ltd.

Aladdin Pty Ltd's year end is 31 December, which is traditionally a busy time for Royal Accountants. Aladdin Pty Ltd currently has an internal audit department of five employees, but they have struggled to undertake the variety and extent of work required by the company, hence Aladdin Pty Ltd is considering whether to recruit to expand the department or to outsource the internal audit department. If outsourced, Aladdin Pty Ltd would require a team to undertake monthly visits to test controls at the various shops across the country, and to perform ad hoc operational reviews at shops and head office. Aladdin Pty Ltd is considering using Royal Accountants to provide the internal audit services as well as remain as external auditors.

REQUIRED:

(a)Explain FOUR (4) safeguards that your firm should implement to address the conflict of interests arising from auditing both Aladdin Pty Ltd and Jafar Pty Ltd.

(b)Explain THREE (3) ethical threats which may affect the independence of Royal Accountants in respect of the audit of Aladdin Pty Ltd, and for each threat explain how it may be reduced (mitigating factors).

(c)Discuss FIVE (5) advantages and FIVE (5) disadvantages to both Aladdin Pty Ltd and Royal Accountants of outsourcing the internal audit department of Aladdin Pty Ltd to Royal Accountants.