Question: Ethical Threats

You are the audit manager of Jones & Co and you are
planning the audit of LV Fones Co, which has been an
audit client for four years. The company specialises in
manufacturing luxury mobile phones.
During the planning stage of the audit you have
obtained the following information. The employees of LV
Fones Co are entitled to purchase mobile phones at a
discount of 10%. The audit team has, in previous years,
been offered the same level of staff discount.
During the year the financial controller of LV Fones was
ill and hence unable to work. The company had no
spare staff able to fulfil the role and hence a qualified
audit senior of Jones & Co was seconded to the client
for three months. The audit partner has recommended
that the audit senior work on the audit as he has good
knowledge of the client. The fee income derived from
LV Fones was boosted by this engagement and along
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 Question: Ethical Threats

From a review of the correspondence files you note that

the partner and the finance director have known each
other socially for many years and in fact went on holiday
together last summer with their families. As a result of
this friendship the partner has not yet spoken to the
client about the fee for last year's audit, 20% of which is
still outstanding.

Required:
(i) Explain the ethical threats which may affect the
independence of Jones & Co's audit of LV Fones Co.

(ii) For each threat, explain how it might be avoided.

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 Approach

You are the audit manager of Jones & Co and you are
planning the audit of LV Fones Co, which has been an
audit client for four years and specialises in
manufacturing luxury mobile phones.
During the planning stage of the audit you have
obtained the following information. The employees of LV
Fones Co are entitled to purchase mobile phones at a
discount of 10%. The audit team has in previous years
been offered the same level of staff discount.
During the year the financial controller of LV Fones was
ill and hence unable to work. The company had no
spare staff able to fulfil the role and hence a qualified
audit senior of Jones & Co was seconded to the client
for three months. The audit partner has recommended
that the audit senior work on the audit as he has good
knowledge of the client. The fee income derived from
LV Fones was boosted by this engagement and along
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 Approach

From a review of the correspondence files you note that

the partner and the finance director have known each
other socially for many years and in fact went on
holiday together last summer with their families. As a
result of this friendship the partner has not yet spoken
to the client about the fee for last year's audit, 20% of
which is still outstanding.

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 Answer
Threat Safeguards
There may be a familiarity threat as LV Fones There should be an
Co has been an audit client of Jones for the independent review of audit
last four years. The audit team and finance working papers.
department of the client are likely to have
forged close relationships which could impair
independence and objectivity.
There is a familiarity threat and self-interest If the value of the discount is
threat present as the audit team are offered a not trivial and
10% discount on purchasing luxury mobile inconsequential, the offer
phones. The value of the discount may not be should be politely refused.
trivial and inconsequential to members of the
team and so independence and objectivity
may be impaired.
An audit senior from Jones was seconded to The audit senior should not be
the client in a financial controller position and involved on the audit of LV
is now also working on the audit of those Fones Co if he was involved in
accounts. This presents a self-review threat the preparation of material
as the audit senior may have to review work directly related to the
that he produced.
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financial statements. Any
 Answer
Threat
Total fees from the provision of services to
LV Fones Co is 16% which is a significant
amount. This gives rise to a self-interest
threat and intimidation threat as the audit
firm will be worried about losing the work
from LV Fones Co. There is also a threat of
self-review from the provision of tax
services.
The partner and finance director have
known each other for a long time and have
holidayed together. This gives rise to a
familiarity threat. There may also be an
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Safeguards
The audit partner should
review levels of fee income
and take steps to reduce the
dependency on this client.
This could be through not
accepting any further work
from LV Fones Co this year
and perhaps declining one of
the engagements in
subsequent years. Also there
should be independent
reviews of the audit work.
Separate teams should be
carrying out the audit and
tax work.
The partner should be
rotated off the audit of LV
Fones Co. The audit working
papers should also be
 Answer

Threat Safeguards
20% of the previous year's audit fee is still The audit partner should
outstanding. This gives rise to a self-interest discuss this with those
threat as the amount outstanding may be charged with governance
significant. There is also the risk of the and as a last resort, resign
audit firm making, in effect, a loan to the from the engagement.
client. Making loans to clients is
prohibited by the ACCA Code
of ethics and conduct.

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