Question 1

You are the audit partner of Merit Chartered Accountants(“MCA”), working on the audit of Darwin Tourist Buses (“DTB”) forthe 2017 financial year. DTB is a provider of luxury bus trips allaround Australia, including both interstate capital city travel andconference and holiday packages. The net profit before tax of DTBfor the 2017 financial year is $14.5M while net assets total $232M.You are reviewing the 2017 audit working papers and note that theassurance services senior has documented a number of situationsthat may lead to a breach of independence for MCA.

Situation 1 It has been documented that the DTB FinancialController has gifted the three audit team members with two freeluxury holiday packages each. The audit manager has concluded thatthe key threat to independence in Situation 1 is‘self-interest’.

Situation 2 The audit team has documented that DTB is intendingto launch a new customer loyalty program. The CFO of DTB hasguaranteed that if the audit team convince MCA and five of itsbiggest clients to sign an exclusive corporate travel arrangementwith DTB, the audit team will receive immediate platinum status(normally requiring a customer to have accumulated one millionpoints), giving them a host of benefits. The audit manager hasconcluded that the key threat to independence in Situation 2 is‘familiarity’.

Situation 3 The audit team has noted that MCA has put forward aproposal to DTB to provide consulting services. The CFO of DTB hastold the audit team that if they do not remove comments in theaudit summary review memorandum to be provided to the auditcommittee about a weakness in the revenue and receivables process,he will not award MCA the consulting work. The audit manager hasconcluded that the key threat to independence in Situation 3 is‘advocacy’.

REQUIRED:

Explain whether the audit manager has correctly identified thekey potential threat to independence for each of Situations 1, 2and 3 above. Your answer should clearly identify what you believeis the key threat to independence in each situation.