(a) Using your knowledge of APES 110, identify and explain the potential type of threat to Fellowes and Associates’ independence in situations (1) and (2) above.
(b) What action should Fellowes and Associates take to eliminate the potential threats to independence in situations (1) and (2) above? What safeguards should be instituted to reduce the risk of similar independence threats occurring in the future?
Let’s first analyse situation 1. One of the accountants intended to be part of the 2014 audit team owns shares in HCHG. The accountant’s interest is not material to him. Section AUST291.104 of APES 110 states that a financial interest, in this case owning shares in the client company, may create a self-interest threat. The section goes on to state that it’s required of the auditor to consider the nature of the financial interest in order to determine the significance of the threat and the appropriate safeguards. This means that issues such as how material is the holding, how senior or junior is the member’s role, what are the member’s duties and whether the financial interest is direct or indirect must be considered in understanding the degree of the threat.
In this situation, the member of the Assurance team has a direct financial interest and according to section 290.106, this self-interest threat would be so great that no safeguard could reduce the threat to an Acceptable Level. Fellowes and Associate would require that the member of that Assurance team dispose of their financial interest or remove this member from the Assurance team.
Now the next situation, Fellowes and Associates was previously engaged by HCHG to value its intellectual property. The consolidated balance sheet (statement of financial position) as at 30 June 2014 includes intangible assets of $30 million, which were valued by Fellowes and Associates on 1 March 2014 following HCHG’s acquisition of the subsidiary Shady Oaks Hospital. The intangibles are considered material to HCHG.
s. 290.173 bring light to the fact that a valuation that has a material effect on Financial Statements may create a self review threat. This means a