Question

Question 2 ([3 + 2] + [3 + 3] = 11 marks)
a. You are the auditor partner for the AAA audit firm, tendering for the audit of
Howard Ltd for the 2019 financial year. During your review of an Australian
Securities and Investments Commission (ASIC) company extract for your client
Howard Ltd, you note that AAA audit firm holds an interest in Howard Ltd. The
interest is material to AAA audit firm.
Required:
1. What is the threat to compliance with the fundamental principles?
2. Explain whether any safeguards could be put in place to reduce the threat to an
acceptable level.
Suggested Answer for part a:

Answer 1

1. The threat of self interest is applied here. It occurs when an auditor owns shares of the client or in the company of the client as it would directly benefit in increasing the client profits.

2. The safeguards can be:

1. AAA audit form does not continue to represent Howard limited's business.
2. Ensuring that AAA is not entitled to any payments or benefits from Howard limited business, unless they are made in accordance with pre-determined arrangements.
3. Involve an another audit form to review the work if necessary.