You are James Lee, an audit partner of GML and Associates that encompasses one== tax partner, two consulting partners, three audit and assurance partners, one information system partner and one legal partner. The Covid-19 pandemic has exerted huge financial stress on your firm, especially when some of clients went liquidation while others reduced spending on consulting services or demanded a reduction on audit/assurance fees. All the partners in your firm have been endeavouring to attract new clients as well as retaining existing clients.

You currently have four clients whom you have audited in the past three years. All of them ask for a reduction of audit fees. There is one potential new client, Short-top Digital Technologies, whom you are evaluating whether to accept. In previous years, GML and Associates usually employed 10 graduates and 10 interns. This year, however, the firm has stopped employing graduates but increased intake of interns to 20. You have four interns who requires lots of training and supervision. Currently, each employee in the firm has to work up to 60 hours a week to secure their position and avoid pay-cut. In addition to the current workload, the supervision of juniors (e.g. interns and graduates) has taken considerable amount of time from the experienced staff. The supervision of juniors' work has become difficult because auditors are all working from home. To cut cost, the annual 2 week-training program has been suspended until further notice. Although you understand that those recent measures would impact on audit quality, its purpose is to keep the firm going concern and avoid executing staff redundancy policy.

Your son, Michael Lee, is a professional accountant working for a foreign company in China before being made redundant due to Covid-19 outbreak in Wuhan province in 2020. Michael returned to NZ and was employed by one of your existing audit clients (Food for Life Ltd) in April 2020 as a Group Financial Controller. You have audited the Food for Life Ltd for the past three years. The audit team have a good relationship with the staff there and are often offered a good discount on products produced by the client which are normally quite expensive. Such offers are even extended to auditors' friends and family. In a conversation discussing the 2020 financial report audit, the CEO suggested that you reduce the audit fee because you and the audit team know the business environment really well and the audit should not take too long.

You are currently auditing Global Media's financial statements for the year ended 30 June 2020. You audited the financial statements of Global Media Ltd both before and after the initial public offering in 2019. You and other partners in the firm had put in a good word about the company's prospect at a press conference organised after Global Media Ltd was officially listed in the stock exchange which was then published in newspapers and business magazines.

During this year's audit, your audit team identified a number of serious issues including: (1) certain transactions were not showing in the company's bank statements; (2) bank confirmations appears to be false; (3) significant differences in deposit balances reported by the bank compared with the amounts identified in previously received confirmations (and in the books and records of the Group). Based on this finding, you think it was appropriate to perform follow-up visit to the client's banks.

The audit manager has found evidence of false confirmation of their clients' cash accounts in order to cover up the records of fictitious revenue and fictitious inflows of cash to agree with the revenues. She confronted the top management and was threatened to terminate dismiss all services provided by GML and Associates. The audit manager was very upset and frustrated. She reported to you what had happened. After verifying the audit documentation, you have decided to resign from Global Media Ltd. You informed the board of partners at your firm and was advised to hold on to the resignation. The reason is that Global Media Ltd contributes 30% of GML and Associates' revenue. In particular, your firm, last year, successfully completed a major project of consulting and implementing an accounting information system for Global Media Ltd. In addition, the tax team has also provided tax advice and tax calculation for the company. The firm is concerned that if you upset the company, it will probably terminate all the contracts with the firm. In the normal circumstance, the firm would have still been going concern, but not during the Covid-19 pandemic.

While you are so desperate, an audit senior (Barry Sadler) approached you with a new client Health Global Pharmaceuticals where his wife is working as a director. While it gives you a financial hope, your major concern is that you have little knowledge in this field. Barry suggested that the audit process is the same and you should accept this client. When specialised knowledge is needed, the audit team can involve an expert and Barry can also ask his wife to gain a better understanding of the field knowledge.

Required:

a)Identify and explain six ethical threats to independence and fundamental ethical principles (18 marks).

b)For each of the threats identified in question (a), propose a safeguard to alleviate the threats to acceptable level. (12 marks).

Note: Students must refer to PES 1 and 3 as reference for their answers.