You are the senior audit manager in Zara and Co. (Zara), a mid-tier, Australia based, global accounting firm with offices in more than 20 countries. You are responsible for monitoring audit quality and ethical issues which arise in relation to audit clients. Simpson Co. (Simpson) is an audit client whose operations involve transport and distribution. The audit report for the financial statements of Simpson for the year ended 30 June 2018 was just issued.

You are conducting a review of the quality of that audit, and any ethical issues which arose in relation to it. Recent information obtained from a discussion with Lester Peiris, the audit engagement partner, is given below.

(a)Simpson's audit committee refused to agree to an increase in audit fees despite the company's operation expanding into new locations. In response to this, the materiality level was increased during the audit, and some review procedures were not carried out. To reduce sample sizes used in tests of details, the samples were selected based on judgement rather than statistical methods. In addition, only parts of the population being tested were sampled, for example, certain locations were not included in the sample of non-current assets selected for physical verification.

(b)Some of the audit works were outsourced to overseas offices of Zara, whose managing partners see it as a way of improving audit efficiency. The overseas office performs the work at a lower cost, and it was largely low-risk, non-judgmental work. For example, numerical checks on documentation.

Some of the audit work of Simpson has been outsourced to Zara's audit office in India.The audit work included some of audit routines such as checking numerical and formatting audit working papers. In addition, the Indian office read the minutes of board meetings to identify issues relevant to the Simpson's audit.

(c)In July 2018, Simpson's former finance director, Russell Gerard joined Zara as an audit partner, working in the same office where Lester Peiris is located. Although Russell was not a member of the audit team, he did update Lester on some business developments which had taken place at Simpson during the period before he left Simpsons. Russell held a considerable number of equity shares in Simpsons, which he sold on 15 July 2018.

Since joining Zara, Russell has been developing initiatives to increase Zara's income. One such initiative is providing non-audit services to Zara's audit clients.

1.Identify and discuss the quality control, ethical and professional issues raised in respect of the audit of Simpson Co. (Any 2 issues)

2.Recommend the actions that should be taken in relation to each of the issues identified in (1) above. Justify your answer.